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Inflation tamed by lower food prices

PRICE increases continued to decelerate in November as analysts see drops in prices of food and fuel as the primary drivers of lower inflation. Energy prices at the beginning of 2014 should help this trend continue well into next year, analysts say.

Lower fruit prices helped push down inflation.(Source: SME)

PRICE increases continued to decelerate in November as analysts see drops in prices of food and fuel as the primary drivers of lower inflation. Energy prices at the beginning of 2014 should help this trend continue well into next year, analysts say.

Slower economic growth means lower demand inflationary pressures in the economy, that are visible especially in the decrease of core inflation, Martin Baláž, an analyst with Slovenská Sporiteľňa, told The Slovak Spectator.

“This year also the headline inflation has slowed down significantly, which decreased especially because of the slower growth of energy prices and food,” Baláž said. “But inflation is not decreasing only in Slovakia, but in the whole eurozone. We may see low inflation for some following months. Inflation may be below 2 percent next year.”

Consumer prices fell 0.1 percent in November, compared with October, while their growth dynamics slowed by 0.1 percentage point to November’s 0.5 percent on an annual basis, the Slovak Statistics Office announced in mid-December.

Slovakia’s annual inflation in November 2013, measured by the annual harmonised index of consumer prices, was 0.5 percent, while a year earlier the rate was 2.4 percent. Prices in Slovakia did not change compared with October, Eurostat, the statistical office of the European Union, announced on December 17.

The EU annual inflation was 1.0 percent in November 2013, up from 0.9 percent in October. But it is still well below rates a year earlier, when it was 2.4 percent. Monthly inflation was down 0.1 percent in November 2013. The eurozone annual inflation was 0.9 percent in November 2013, up from 0.7 percent in October. A year earlier the rate was 2.2 percent. Monthly inflation was -0.1 percent in November 2013, Eurostat reported.

According to Boris Fojtík, an analyst with Tatra Banka, the development of consumer prices is surprising again.

“Instead of stabilisation of the year-on-year growth dynamics of prices we see again a lower growth,” Fojtík wrote in a memo. “In November there was registered the third month-to-month drop in prices this year.”

Fojtík sees food and especially the unusually strong drop in fruit prices as having the strongest influence over the slowdown in growth dynamics.

“We have not seen a fall in prices by more than 10 percent on the monthly basis for the last six years at least and it was drawn especially by exotic fruit and apples,” Fojtík said. “The second strongest factor was prices for motor fuels, where the favourable development of prices of crude oil and the US dollar enabled their reduction. In November, motor fuel prices shrank by 2 percent on a monthly basis and we see the same figure also in the year-on-year development of prices in the whole transport sector.”

According to Ľubomír Koršňák, an analyst with UniCredit Bank Czech Republic and Slovakia, November has confirmed that for the time being the economy lacks anything that would drive inflation.

“Demand inflation, measured by the index of prices of tradable goods and market services, decreased by 0.1 percent in November,” Koršňák wrote in his memo. “On a year-on-year basis its growth slowed down from 1.0 percent to 0.7 percent.”

The growth of tradable goods prices slowed, probably as a consequence of several factors including slowly recovering consumer demand, low import inflation and the drop in prices for producers, according to Koršňák.


The National Bank of Slovakia estimates in its latest prognosis from December 10 annual inflation at 1.5 percent for 2013 while it expects that prices may increase by 1.3 percent in 2014. It warns in its bulletin that inflation in 2014 may be higher due to the euro depreciating against the US dollar and to imported inflation.

The current growth of prices is only narrowly above the historical low from years 2009 and 2010, while Fojtík expects that prices will continue to fall during the months to come and the inflation rate may drop below 0.4 percent on annualised terms. Koršňák of UniCredit sees no factor likely to push inflation up for now. Still relatively low household consumption reins in demand inflation, and the autumn harvest helped to limit food price increases. Oil prices on world markets are more or less stable.

“Thus the inflation should remain at low levels also during the upcoming months,” Koršňák said.
Fojtík as well as Koršňák point to the announced reduction in some energy prices.

“The beginning of the year will be very favourable from the consumers’ point of view and the announced 7-percent decrease in electricity prices and only a very moderate growth of prices of other energies can get the inflation even closer to zero,” said Fojtík, adding that in case food prices along with motor fuel prices continue to decrease, Slovakia may fall into deflation.

According to Koršňák, inflation may remain at levels close to zero during the whole first half of 2014.

“We expect a moderate acceleration during the second half of the year at the earliest,” Koršňák said, adding that this would happen only when domestic consumption rises. He expects that inflation will remain below 2 percent.

Baláž of Slovenská Sporiteľňa does not expect Slovakia to drop into a deflationary situation as the inflation rate usually develops parallel to that in other eurozone countries.

“In case deflation pressures occur in the eurozone, the European Central Bank would respond to them with further releasing of monetary policy,” he said.

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