Cut in alcohol tax brought prices down; last deflationary spell experienced in Finland in 1955

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The reduction in alcohol tax from March 1st prompted a downward trend of 0.5 % in consumer prices compared with those in March last year. This was a historic event, as the last time Finland experienced price deflation was in 1955.
      However, according to Timo Koskimäki of Statistics Finland, one should not talk about deflation based on one month's decline in prices.
      "Deflation means, after all, a long-term uninterrupted decline in prices, for example like that which has occurred in Japan. In Finland the fall in consumer price levels is likely to last for only a temporary period of a few months".
      In terms of price developments, the post-war years of 1954 and 1955 were unique, when prices fell by 1.6 % in 1954 and by 5.5 % in the following year.
      The decline was the result of a political agreement to refrain from raising prices and wages and to lower the prices of certain commodities.
     
This decision was possible because the price level was not determined by the market, while a control economy of sorts was still prevailing in Finland.
      This kind of political consensus was a consequence of the immediate post-war years, when the annual inflation rate ran at about 60 % at its worst. Still at the beginning of the 1950's, annual inflation could be some 14-16 %, a trend which was accelerated by the boom created by the Korean War.
      The deflationary period lasted then for about four years. Since 1956 prices have been steadily rising again.
     
The price development for March 2004 came as no great surprise; a slight decline in prices was expected after the government's decision to lower the taxation on alcohol.
      Koskimäki expects the deflationary period to last over the next few months, but he believes that a slight increase in prices will take place by the end of the summer at the latest.
      According to Statistics Finland, cheaper alcohol beverages brought consumer prices down by 0.8 percentage points in March, while cuts in interest rates pushed down prices by another 0.5%-points. Falling prices of liquid fuel - or rather cheaper gasoline prices - from the high level of the previous year curbed inflation by 0.3%-points and the lower cost of air travel added another 0.2%-points.
      On the other side of the coin, consumer prices were pushed upwards by rising charges for cultural and leisure services, as well as by the higher prices of dwellings and rent increases.
     
The annual rate of inflation in Finland last year was 0.9 %. Various institutions have forecast a lower figure for this year, but none have forecast a year-on-year fall in consumer prices.
      The Bank of Finland's projection for this year's inflation is 0.1 %, whereas Nordea Bank predicts 0.6%.
      Further pressure on a higher rate of inflation is likely to be felt over the next few months, as at least the pump prices for gasoline at filling stations have been on the increase during the last few months.
      According to Statistics Finland, the inflation rate within the EU region in March was the same 1.6 % as recorded in February.


Links:
  Statistics Finland: Cut in alcohol tax brought inflation down to -0,5 per cent in March
  Nordea Bank: Press releases 2004

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