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Domestic inflationary pressures on a downward trend

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Martin Lindpere, Eesti Pank, economist

According to the data of the Statistics Estonia, the cost of the Estonian CPI basket increased by 0.6% in June 2008, keeping the year-on-year price growth still above the 11% level.Like in previous months, the growing cost of motor fuel dominated in June as well. The price increase of domestic factors continued at a slowing pace. For example, the price growth of services decelerated for the fifth month in a row.

The recent months' main message is that the inflation outlook of the global economy is deteriorating - a trend which continued also in June, despite slowing global growth. Preliminary estimates indicate that the euro-area inflation accelerated to 4% in June. The price hike of fuel and food contributed most to this development.

Owing to domestic factors, the Estonian inflation is on a downward trend and this tendency is set to continue in the second half of this year and reach the next year as well. The more flexible is the reaction of wages and prices to the changing economic environment, the smaller are the losses incurred during the shift from one economic growth cycle to another.

Estonia's current inflation rate and growth outlook have undermined consumer confidence and resulted in greater caution as regards spending. In order to re-attract customers to their stores, traders should drop prices more extensively. The price mark-ups added in the retail trade have been growing rapidly in recent years, thus providing a basis for lowering inflation.

The next months' inflation will be primarily affected by increasing excise duties and the price of thermal energy, but as the domestic price pressures subside, inflation should start to slow in the second half of the year.