Prices shoot up like in the wild nineties: increased even without any reason

The chain's own products are almost untouched by the general price increase, as they are procured on the basis of long-term contracts and in large quantities. Photo: Marko Saarm/Sakala

• Estonia’s annual inflation sped up to 19 percent in April.
• The share of foodstuffs of the consumer basket in Estonia is by one third higher than the euro area
• Sales of products and services with steeply increased prices slow down.

Estonia’s annual inflation accelerated to 19 percent in April according to the Eurostat preliminary estimate. The last time we saw such rapid price rise was in the spring of 1996. April price rise in Estonia was also the highest in the euro area where the prices on the average increased “only” 7.5 percent.

The price level is mainly increased by energy and food, the share of which in the consumer basket is higher in Estonia than in the euro area generally and therefore our price rise is faster. “The price of electricity has increased from 25 euros to almost 150 euros per megawatt-hour within one year. World market prices of oil have almost doubled and the euro has lost one fifth of its value over the year. All these factors contribute significantly to Estonia’s price rise,” said Luminor’s chief economist Lenno Uusküla.

According to Uusküla, the share of food and non-alcoholic drinks, housing and fuels of the Estonian consumer basket is significantly higher than in a number of countries. “The share of foodstuffs in our country is 21 percent compared with 16.5 percent in the euro area, or higher by nearly one third.”

The shoppers believe that the increase of the prices of eggs, fish and dry goods is the most noticeable. “While a carton of ten L-size eggs cost 1.29–1.39 euros last year, the present price is 1.69–1.99 euros. The price of salmon fillet has gone up by half and the price of buckwheat has almost doubled,” said Piret after visiting Maxima, adding that she increasingly has to pay attention to prices and retail chains’ discounts while shopping. “Just like when to use the water boiler to save energy or when to do washing because otherwise I cannot make the ends meet until next payday”.

The price of the consumer basket put together by Postimees increased 22 percent in April over month. It is true that Lidl entered the market in March and forced a reduction of prices in the other retail chains as well. According to Kaimo Niitaru, food selection and procurements manager of Prisma Peremarket, the price increase of foodstuffs will regrettably continue. “Since the uncertainty in the world economy persists, the producers keep reporting the increase of input prices,” he said. “Many products are already ten percent more expensive. However, the prices of private label products have increased less because their procurement contracts are very long-term and of very large volume.”

According to Lenno Uusküla, Estonians also spend a large part of their income on housing. “The share of housing expenditures is 17 percent, compared with 12 percent in the euro zone, or higher by almost a half,” he said. While the share of transport costs in the consumer basket are more or less comparable, the share of fuels is still higher in Estonia, accounting for six per cent against four per cent in the euro area. In all groups, the share of goods related to world market prices is also higher in Estonia. “This is an important part of the price increase if they are combined,” said Uusküla.

He said that unfortunately there are indications that enterprises raise their prices even when the increase of costs would not justify it. “It is not the time now to tell how well you are doing and they prefer making use of the opportunity to go along with the general price rise.”

According to Rasmus Kattai, an economist of the Bank of Estonia, the faster-than-average inflation is driven not only by higher energy and food prices but also by a fast growth of motor vehicle and rental prices. “The rise in rent does reflect the increasing demand due to the war refugees, but income went up very rapidly before the war and this accelerated price growth in many other groups of services and goods besides rents,” Kattai said.

The much faster recovery of the Estonian economy from the effects of the pandemic, vigorous wage growth and the money withdrawn from the second pension pillar have added much more impetus to price growth here than in the other euro area countries. “All the above reasons also explain why, for example, the price increase in Finland lags behind ours several times."

At the same time, according to Kattai, the outlook for wage growth is very strong this year, approaching 10 percent, but it nevertheless remains well below the prices increase. “The weakening of purchasing power this year is reflected in a setback in consumption and it will also slow down economic growth," he said. "As the massive price increase has also affected the unavoidable expenditures, food and housing, it is likely that the people will economize on the purchase of durable goods, leisure services and elsewhere."

There is some evidence that the sales of higher-priced products and services are already declining. "While in the second half of last year companies had a good opportunity to take advantage of the situation where the amount of free money and demand in the economy grew rapidly, now both the rising input prices and declining real purchasing power have limited such opportunities," Kattai added.

The high price has already reduced the buying of gasoline, says Mart Raamat, CEO of the Estonian Oil Association. “Sales volume went down 12 percent in March,” Raamat admitted. “But the price of diesel fuel has increased faster than those of crude oil and gasoline and since the haulers use diesel fuel, this influences the prices of nearly all goods you can find in the shops.”

According to Liis Elmik, Swedbank's senior economist, the Estonia’s fastest price increase in the euro zone is partly due to different national methodologies. "For example, the price index for electricity in Estonia uses only the electricity exchange price, meaning that the actual electricity price increase in Estonia has been less steep than the statistics show, because about half of consumers use fixed electricity prices for some period,” Elmik explained. Countries also use different schemes for energy subsidy packages. Some countries support the producers, others the consumers. “Estonia partially reimbursed energy costs in retrospect, which means that the consumers initially had to pay more and this higher price was also reflected in the price index statistics."

But in Elmik’s opinion consumption is still growing rapidly. “The price-adjusted volume of retail sales in Estonia increased by ten percent in the first quarter over year,” she said. “Swedbank's card payments also show that consumer confidence persists. As incomes are growing slower than the prices, we forecast a slowdown in consumption growth this year, but not a decline.”