Swedbank: Inflation may exceed 7 percent in coming months

Money. Source: Siim Lõvi /ERR

Inflation in Estonia may climb above 7 percent in the coming months, as increases in the prices of all energy carriers have not yet reached the price index, said Liis Elmik, senior economist at Swedbank Estonia.

Statistics Estonia said Friday morning that the price of the consumption basket increased by 7 percent over the year in October.

"We last saw such a rapid price increase 13 years ago. The price increase would have been even faster, 7.4 percent, without the reduction in the price of the electricity network service," Elmik said in a press release. 

The economist observed that the acceleration of the price increase was as expected and was due to the higher price of motor fuels. Full-year inflation should end up in the region of 4 percent, however, as inflation was slower in the first half of the year.

The price increase should decelerate in the spring of next year, and inflation will hit 3.6 percent next year, primarily due to lower energy prices, according to Swedbank. At the same time, food prices and rentals will rise more in 2022 than this year.

The economist pointed out that half of the 7 percent price increase was due to higher energy prices, which included a 40 percent rise in the price of electricity on year.

"The exchange tariff of electricity was still high in October, but lower than in September, as the weather has become more favorable for electricity production. The rapid rise in the price of other energy commodities has also led to a rise in oil prices," Elmik noted.

Crude prices crossed the $80 mark in October. The price of motor fuels at filling stations in Estonia has increased by a third during the year. According to Swedbank, energy prices will remain high until the spring, as demand for energy is strong, while supply is limited.

"Even though the share of energy in the production costs of various goods and services is generally modest, price increases are accelerating as demand for different goods and services is strong in the economy and there is a shortage of many goods in stores. The price growth expectations of consumers have risen significantly," Elmik said.

The average salary and pension have risen at least as much as prices this year. In the third quarter, the net salary of Swedbank's customers was 6.5 percent higher than a year ago. The average pension increased by 6.1 percent in the second quarter.

Elmik noted that the rapid rise in prices has not discouraged consumers. "Families' assessment of their financial situation remains at a record high. Consumption is growing rapidly," she said.

The volume of retail sales rose by as much as 17 percent in September. Domestic card payments by customers of the three largest banks were up by roughly 75 percent on year in September and by around half in October.

"The spread of the virus, new restrictions and the diminishing impact of the spending of pension savings will slow consumption growth in the coming months, however," the economist added.

Estonia's retail growth among fastest in Europe

The volume of Estonia's retail trade in September this year increased by 7.1 percent compared with August, while the increase year over year was 16.8 percent; both growth rates for Estonia were among the highest among European Union member states.

The seasonally adjusted volume of retail trade in September decreased by 0.3 percent in the euro area and by 0.2 percent in the EU, compared with August 2021, according to estimates from Eurostat. Compared with September 2020, the calendar adjusted retail sales index increased by 2.5 percent in the euro area and by 3.2 percent in the EU.

In August 2021, the retail trade volume increased by 1 percent in the euro area and by 0.8 percent in the EU. In Estonia, a decline of 1.2 percent was recorded, which was one of the biggest reductions month over month seen in the region in August.

In the euro area, in September 2021, the volume of retail trade decreased by 1.5 percent month over month for non-food products, while it rose for food, drinks and tobacco by 0.7 percent and for automotive fuels by 1.1 percent.

In the EU, the volume of retail trade decreased by 1.3 percent for non-food products, while it rose for food, drinks and tobacco by 0.8 percent and for automotive fuels by 1.0 percent.

In the euro area, compared with September 2020, the volume of retail trade increased by 4.4 percent for automotive fuel, by 3.7 percent for non-food products and by 0.5 percent for food, drinks and tobacco.

In the EU, the retail trade volume increased by 4.8 percent for non-food products and for automotive fuel and by 0.8 percent for food, drinks and tobacco.


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Editor: Kristjan Kallaste

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