Lower deflation in June; great uncertainty over price developments in the coming months

The lifting of the measures to contain and control the coronavirus epidemic, and the rebooting of large parts of the economy were reflected in a smaller fall in consumer prices in June compared with the two previous months. Amid the recent deterioration in the epidemiological picture and the reimposition of certain measures, future consumer price developments remain uncertain. Given the deflationary pressures caused by falling private demand and the absence of major cost pressures, Banka Slovenije expects inflation to remain weak this year.

The year-on-year fall in consumer prices slowed slightly with the lifting of the containment measures. Deflation stood at 0.8% in June, 0.6 percentage points less than in May. The smaller fall in prices was primarily attributable to electricity prices, which returned to their previous level in June, after the expiry of a government ordinance that cut electricity prices for households and small businesses between March and May. This showed up statistically as a price rise of 40%. Low prices of refined petroleum products remained the largest factor in falling prices; the government is continuing to hold retail prices at one euro per litre by lowering excise duties as global oil prices enjoy renewed growth. Food price inflation also declined, to 2% in June, having been driven upwards during the epidemic by fruit prices amid barriers to trade.

Core inflation, i.e. inflation excluding energy and food prices, also remained low in June: it was below 1% for the third consecutive month. It has been driven sharply downwards since the outbreak of the epidemic by the year-on-year fall in prices of non-energy industrial goods. After an initial run-down of inventories, the fall in prices of non-energy industrial goods has declined slightly. Service price inflation slowed again slightly in June, to 1.7%. The figure is already a more reliable reflection of the situation in the market: since the lifting of containment measures, the conditions for collecting prices have normalised, with the exception of passenger air transport and certain package holidays. While the measures were in place, the temporary ban on the direct sale of goods and services meant that it was impossible to collect prices for the majority of services.

Despite the initial signs of recovery, future developments in consumer prices remain uncertain. After declining sharply during the epidemic, the indicator of firms’ expectations of future growth in selling prices rose slightly in June, but a large share of firms in manufacturing, services and construction are still forecasting a fall in selling prices over the next three months. Another indication of the uncertainty surrounding future price developments came during the epidemic, in the form of the wider range in consumer inflation expectations. There was also a sharp increase in the heterogeneity of changes in individual products and services making up the consumer price index, as different suppliers and providers are affected differently by the current crisis.

Price developments over the remainder of the year will depend on the evolution of the epidemic, and the balance of supply-side and demand-side factors. Banka Slovenije expects the negative impact of reduced private demand to prevail amid rising unemployment and more modest growth in average wages, which means that consumer price inflation will be weak this year. These expectations are also based on the identified absence of cost pressures, as global commodity prices and import prices fell sharply at the height of the pandemic, while cost pressures on firms have also been relieved by the partial subsidisation of wages and the option of interest deferrals.

In this situation, Banka Slovenije should reiterate that if the longer-term inflation outlook remains at low levels, the Eurosystem will consider using all of its instruments to ensure medium-term price stability.

Figure: Contributions to inflation

Sources: Eurostat, SORS, Banka Slovenije calculations