Inflation has been faster than in Estonia's neighbours largely because of rising energy prices
Economist at Eesti Pank
Prices in Estonia were up by 3.8% over the year in June based on the national CPI weights, or by 3.7% based on the HICP flash estimate. Inflation was lower in neighbouring countries, as the flash estimate of the harmonised price index in Latvia was 2.6%, and in Finland it was 2%.
Increased economic activity raised inflation, as greater demand allows prices to rise faster while supply has not yet returned to its pre-pandemic levels for all goods and services. Inflation is being boosted both by the long supply shortages of goods and by cafe terraces filling up. Sharper labour shortages in some areas have caused price pressures for businesses, while consumers who feel they are doing well financially may more easily accept higher prices. Prices rose rapidly in June for accommodation services and for eating out, and this can be linked directly to the relaxation of the coronavirus restrictions and the revival in the economy. Inflation also picked up for clothing and footwear, but the price of food and non-alcoholic drinks was more or less the same as a year earlier.
Inflation rates have been different in Estonia and in neighbouring countries largely because of rising energy prices. This is an unusual situation because similar factors affect energy prices in Estonia, Latvia and Finland, and so inflation for energy should not differ between the countries by much over the long term.
A large part of the differences between the inflation rates in Estonia and Latvia can be explained by the price of electricity. The exchange price of electricity in May and June was almost double what it was a year earlier and this raised inflation by 0.8-1.1% in those months. Although the dynamics of the exchange price for electricity are the same in all the countries, the electricity component in the consumer price index varies between countries so that electricity did not particularly raise consumer prices in Latvia and Finland in May, but it did in Estonia. More precise data on neighbouring countries for June are not yet available. This contradiction between different indicators suggests the differences are more methodological than essential, meaning that inflation in Estonia and Latvia may actually not be as different for consumers as the statistics indicate.
Inflation was even higher in Estonia in June but it moved differently in neighbouring countries, as it slowed in Finland and was the same in Latvia in June as in May. Fuel prices restrained inflation in Latvia. Fuel prices fell by more last spring in Latvia than they did in Estonia and the lower reference base means that fuel price inflation was notably higher in Latvia in April and May this year than it was in Estonia. This effect disappeared in June, bringing down inflation in Latvia.
Several excise taxes in Estonia are higher than those in Latvia but this does not explain all of the difference in the price of fuel, as it is higher in Estonia even when prices are taken without tax. The price of petrol in Estonia in June this year was about 10 cents a litre higher than the price in Latvia for example, but only about half of this price difference came from taxes. Diesel remains cheaper than in Latvia, but given the lower excise in Estonia on diesel, Estonian consumers ought to benefit from an even wider price difference (see Figure). The gap between fuel prices in Estonia and Latvia widened in spring 2020. Without the contribution of taxes, fuel cost on average more than 10 cents a litre less in Latvian filling stations than in Estonia at the peak of the coronavirus pandemic in April and May 2020. For some weeks the price gap for diesel excluding taxes was more than 20 cents a litre.
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