Record energy prices are restricting purchasing power
Economist at Eesti Pank
Data from Statistics Estonia show that consumer prices in December were 12.2% higher than a year earlier. Inflation averaged 4.6% in 2021.
Inflation in December was the highest seen in the past 20 years. It was high for both goods and services. Half of the total rise in prices in the consumer basket came from energy, as prices for electricity and gas were more than 120% higher in December than a year earlier, while heat prices were up 40% in consequence. At the same time, the world oil price fell a little as the pandemic again became worse. A new factor in recent months has been that food prices have started to rise. Dairy and fish products and vegetables have risen most in price.
High energy prices mean that inflation will not come down in the near future. More expensive energy increases the production costs of companies and will in the coming months be passed through into the prices of other goods and services. It is bad for the economy if a temporary spike in inflation were to lead to higher labour costs for companies, pushing them to adjust their own prices and so causing a wage-price spiral. This would make the economy less competitive and so would threaten jobs.
High inflation limits people’s purchasing power. Although wage growth is quite fast at 7-8% because of labour shortages, it will still remain temporarily slower than inflation, and so real purchasing power will decline. Price pressures are expected to weaken and purchasing power to recover in the second half of 2022. Eesti Pank forecasts that the average inflation for Estonia this year will be 6.9%.