Analysts: Price, wage inflation likely feature of much of this year

Euros (photo is illustrative of course).
Euros (photo is illustrative of course). Source: Scheffbuch/Caro/Scanpix

Rapid inflation experienced in the latter part of 2021 will show no sign of abating in the first half of 2022, according to some experts, while price rises might even be exacerbated by wage inflation prompted by the inflation, setting off a vicious circle likely to last beyond the forecast drop in energy prices once winter ends.

However, a slowdown in inflation can be forecast later on in 2022, as high energy costs abate, and also given the high reference base for the second half of 2021.

Analyst at Estonian bank LHV Kristo Aab said the rise in CPI reported for December 2021 was no surprise.

He said: "It was common knowledge that electricity and gas prices in December stood at a record level. In this respect, the inflation has been more rapid than in the preceding months, but there was nothing new in direct relation to these components.

Aab said the high inflation rate would remain in the first half of this year. "I would not venture to say whether this growth will remain in the double digits or fall below 10 percent, but it is likely to remain at the same level. Prices have fallen somewhat below their record levels, but they have not really fallen significantly, and the comparison base has not yet grown either. We will see the technical effect of this, towards the end of the summer."

While other sectors such as food and fuel were behind the soaring inflation as well, Aab said, energy was the main component.

"Energy prices are fueling inflation and we have seen food prices also rise and become more visible in recent months, although the effects of this are certainly not comparable to energy prices," he added. "It's been a pretty one-sided price increase right now."

In addition, a negative scenario has materialized where energy prices have remained too high for too long for other industries to ignore, SEB Bank analyst Mihkel Nestor told ERR.

This will include the inflation being passed on to the price of food, which is an important part of a household budget, Nestor added.

Both analysts agreed that that inflation may start to dampen in the spring due to declining energy consumption, in addition to the high base rate noted above.

Even after this, prices as a whole will most likely remain high, Aab said, partly by leaching out into wage inflation.

He said: "In fact, there is such a risk of a spiralling effect, a rapid rise in prices will make wages rise rapidly at the beginning of the year, and this will further ignite inflation.".

Mihkel Nestor said it is likely that despite rapid inflation, wage growth have the effect of driving up prices, while the public's real incomes will not increase in line with that.

"Unfortunately, there are always exceptions, and the relative well-being of people whose incomes are not rising this year is declining significantly," he said.

Price inflation and wage inflation has a symbiotic effect, with rising prices leading to requests for higher wages, which in turn are passed on to higher prices by businesses, to cover the increased salaries.

"Traditionally, wage negotiations take place at the beginning of the year, and double-digit inflation will inevitably force people to ask for more wages from their employers," Nestor said.

Those on a fixed income will suffer even more, Nestor added.

The CPI rose by over 12 percent on year to December 2021, state agency Statistics Estonia reported Friday morning.


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Editor: Andrew Whyte

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