Energy contributed a half of the inflation in June
economist at Eesti Pank
Consumer prices rose 21.9% in June over the year, energy contributing a half of the total inflation just like in previous months. The rise was driven most by electricity prices, which remain high despite summer. It must also be taken into account that the impact of energy on consumer prices is greater in countries, where it makes up a larger share of the consumer basket. Compared to Estonia, the share of energy in the consumer basket is higher only in Latvia this year. Food prices provided a quarter of the total annual inflation as a result of growing commodity prices and the energy prices passing into food prices with a slight lag.
At the same time, inflation is broad-based in Estonia. Core inflation (excluding energy and food prices) has been one of the fastest among EU countries over the last months, rising 10% in June. In cross-country comparison, a positive correlation is evident between household disposable income and prices: countries with higher core inflation have also seen a faster growth in deposits during the pandemics. Restrictions on consumption and entertainment in the past two years contributed to the growth in deposits, which households started to spend rapidly once the restrictions were relaxed. Estonia also stands out for its pension reform in autumn 2021, which enabled people to take their money out of the second pension pillar, leading to a large additional money flow for households. Rising demand does not necessarily always cause price growth. However, currently it coincides with pandemic- and war-related disruptions: more money is competing for a limited volume of goods, and supply has not adjusted to that yet.
Looking ahead, energy prices will remain high, affecting also the prices of other services and goods. A more notable easing of inflation may be expected at the beginning of 2023.
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