Estonian cbank: Inflation continues to fall

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The decline in inflation in Estonia has largely come from prices falling for energy and a range of commodities, but it takes time for the effect of these lower prices to pass through into the end prices of other consumer goods, according to economist at the Bank of Estonia Rasmus Kattai.

Annual inflation in Estonia continued to come down, sliding from 11.3 percent in May to 9.2 percent in June. Inflation has been falling since September last year and the central bank forecasts that it will be below 5 percent in the second half of the year.

"A large part of the rise in the cost of living in June came from food, as it had in previous months, and food prices accounted for around half of the rise in the price of the consumer basket. Prices of fruit and vegetables have risen most over the year, gaining about 35 percent, while meat and dairy products have increased by a little more than 15 percent. It is apparent though for food prices as well that the rate of inflation is slowing," Kattai said.

Most agricultural commodities becoming cheaper, together with lower energy costs, will combine to reduce the upwards price pressures of this group of goods in future.

"Exceptions are sugar and meat, for which the prices on global markets have started to rise again in recent months. The general price level of food goods is around a quarter below its peak of last year, and cheaper commodities are just starting to have an impact on retail prices," Kattai said.

The rise seen so far in consumer prices has been notably larger than the increase in production costs, and corporate profits have grown handsomely from consumer spending. The Bank of Estonia estimates that around 40 percent of the rise in the cost of living in the first quarter came from an increase in price margins, though this proportion was even larger last year.

"Companies can, however, no longer rely on very lively demand to give their profits a healthy boost, though companies in various sectors managed to make use of that opportunity to very different extents. The ability to increase profitability has been notably squeezed because the effect of the demand encouraged by the money saved during the pandemic and withdrawn from the second pension pillar has receded, while higher interest rates are now clamping down more on demand. The cost pressures caused by the energy crisis and supply pressures have also eased, meaning that general inflation will fall further in future," the economist said.

Although inflation is falling and the average wage is growing fast, the purchasing power of wages has not yet returned to where it was before inflation took off. Real wages have been growing since September last year, but purchasing power may be expected to recover fully in 2025.

Data from the Tax and Customs Board show the growth in wages paid out exceeded 10 percent throughout the first five months of the year, and wages will continue to rise quite fast moving forward. It should be noted though that the rise in VAT will raise the cost of living further in the coming year and hold inflation at close to 4 percent while pushing the recovery in purchasing power somewhat further into the future.