Deflation continues in May; price measurement proves challenging in extraordinary circumstances

Driven by the epidemic, Slovenia continued to record deflation in May. It stood at 1.4%, a significant part of which was attributable to falling energy prices. Banka Slovenije should nevertheless draw attention to the lower reliability of the consumer price figures during the extraordinary circumstances of the coronavirus epidemic. The absence of a market and the inability to conduct fieldwork are causing problems in the collection of price data, and in certain sectors it is completely absent. The structure of consumption has also shifted significantly in the extraordinary circumstances.

Amid the epidemic and the measures to curb the spread of the virus, major difficulties have arisen in the collection, verification and processing of consumer price data for goods and services. As a result of the lockdown measures introduced in European countries at the outbreak of the epidemic, there was no access to the majority of consumer services. The strict lockdown period saw the closure of hotels and restaurants, cultural institutions, sports centres, non-food shops and other establishments offering personal services, while public transport and flights were also suspended. The absence of a market and the inability to conduct fieldwork caused problems in the collection of consumer price data. Statistical offices are using substitutes for the missing data in line with Eurostat’s recommendations.

The substitution of price data entails lower reliability in individual price indices. Moreover, while the measures were in place another substantive issue arose in the form of changes to the structure of consumption: the weighting of the basket of prices has remained unchanged, and reflects last year’s patterns of household consumption.

Driven by the coronavirus epidemic and the associated measures, Slovenia continued to see deflation in May, in the amount of 1.4%. There was again a notable fall in energy prices, as electricity prices were cut by almost 30% for a period of three months by government ordinance, and prices of motor and liquid fuels were driven downwards by plummeting global oil prices. Energy prices in May were down more than 20% in year-on-year terms. June is expected to see growth strengthen, amid a gradual rise in global oil prices and the expiry of the ordinance cutting electricity prices. Prices of non-energy industrial goods also fell in year-on-year terms for the second consecutive month, which was attributable to a rundown of inventories amid reduced demand and liquidity difficulties at firms.

Falling economic activity

A number of sectors were fully or partly shut down in the second half of March, and the lockdown measures hit the service sector particularly hard. This has already been reflected in a year-on-year decline in economic activity, which amounted to 3.4% according to seasonally adjusted and calendar-adjusted figures, comparable to the overall figure for the euro area (which saw a decline of 3.2%). According to Banka Slovenije, it is already clear that for some sectors the recovery will be a lengthy process. Given the downturn on the labour market, and the general level of consumer caution, household consumption is declining, in particular demand for non-essential goods. If uncertainty on the part of firms makes the labour market slow to recover, the period of weak demand will also be longer. For certain other sectors the crisis also presents an opportunity (for more, see press release).

The extraordinary circumstances also mean that data sources used in the measurement of GDP are lower in quality and less reliable than normal, which entails a risk to the quality of estimates of macroeconomic aggregates, and consequently makes major revisions more likely.