Inflation falling will help purchasing power grow

Autori Rasmus Kattai pilt

Rasmus Kattai

Economist at Eesti Pank



The consumer basket in Estonia was 2.5% more expensive in June than it was a year earlier, and 0.4% more than in the previous month. Inflation was still at 5% in January this year, but it has since fallen consistently from month to month, mainly because energy prices have fallen. Inflation was at its lowest level of the past three years in June.

Prices fell most in the consumer basket over the year for gas and air tickets, which both came down in price by a tenth. Prices for fruit and vegetables have come down substantially, as have prices for accommodation services, contributing to the fall in inflation. The majority of the consumer basket is more expensive than it was a year ago, and services are the main cost type that has raised the price of the basket. Prices have risen fastest for transport, medical services and package holidays, and also for various beauty services. Growth in wage costs has been the main driver of the increase in services prices, as wages have continued to rise quite fast.

Data from the Tax and Customs Board showed that the growth in wages has held at 7–8% in recent months, while inflation has fallen below 3%. This means wages are rising at a faster rate than general inflation, and so the purchasing power of consumers will improve further. Surveys for the Estonian Institute of Economic Research show that expectations for future inflation have equally fallen, and people assess their future financial position as better than they did before.

Eesti Pank forecasts that inflation this year will average around 4% in Estonia. Inflation will probably rise a little in the second half of the year as energy prices will climb for seasonal reasons and higher prices for food commodities will gradually pass through into retail prices for food. The upwards price pressure from production costs for businesses is notably less than it was last year, while almost half of the rise in the cost of living this year is coming from tax increases for VAT and excise on alcohol and tobacco. Although it is still not fully clear, it is possible that inflation in the coming years may, like this year, be affected by new tax policy decisions taken to cover the increased spending by the state and to reduce the budget deficit that has become permanent.

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Viljar Rääsk
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