The impact of the war in Ukraine has reached inflation
Economist at Eesti Pank
Consumer prices were up 18.8% on average on the year in April 2022. Prices were on average 3.5% higher than in March. One cause of higher inflation was that the support intended to ease the impact of rising energy prices ended in March. Natural gas was in consequence 87% higher in price, heat was up 58%, and electricity was up 29%. Energy prices still provided only half of total inflation in April though, as the rise in prices for manufactured goods and services, which averaged 10% over the year, had the same impact. This meant that the consumer basket rose in price over a broad base, with rising energy prices joined in driving inflation by supply problems and very strong demand.
Higher import prices meant that costs for companies increased rapidly, which will cause broadly based inflation to persist. Higher prices for the inputs needed for production are a danger above all for exporting companies, as it is harder for them to pass higher costs on into prices. Statistics for export prices indicate that production of processed foods and of furniture has so far coped with rising prices for inputs. Terms of trade for the production of chemicals, construction materials, and clothing have deteriorated a little. The disappearance of the Russian market for some manufactured goods could lead some companies in the European Union to start to lower prices.
Rapid wage growth and strong demand are also pushing prices up. Demand from consumers has remained strong, as the data from the Tax and Customs Board show that wages paid out in March were around 11% more than a year earlier. Households built up large additional savings during the pandemic and some money withdrawn from second pillar pensions has been directed into consumption. The strength of demand is indicated by firm growth in retail sales, especially for manufactured goods, as retail sales in March were up 36% on a year earlier. As economic activity will decline because of the war in the short term, domestic inflation pressures will ease a little.
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