Macroeconomics professor: We have to get used to prices remaining higher

Shopper in a supermarket.
Shopper in a supermarket. Source: Ken Mürk/ERR

Despite increasing wages, prices in Estonia have increased 15.2 percent as well, households are pinching pennies and the more vulnerable may need additional help. The government is debating support measures from the supplementary budget, but according to macroeconomics professor Raul Eamets, higher prices are here to stay.

While banks are forecasting up to 2-percent growth in private consumption, many families have started to curb their spending. While spikes in electricity and gas prices were a major concern for many families over the winter, that concern is being supplanted by worries over rising food prices.

"My groceries have gotten significantly more expensive — by €10," said Merje, a small-town resident in Southern Estonia. She noted that she has had to cut meat products from her shopping due to rising costs. "Other things I'm still buying, but less of them."

"It's a pensioner thing — you see that an item is about to expire and you take that," Tõnu explained. "You know what's been marked down and what's on sale."

"Grocery store prices are just terrible," Ata said. "Even dog food is very expensive — had just dog food been a little better... I'll get by somehow. I get a [monthly] pension of more than €400, and I have to make ends meet with that somehow."

According to Raul Eamets, professor of macroeconomics at the University of Tartu (TÜ), there are areas being impacted more than usual by current price increases. Both increased energy prices as well as shortages of raw materials in the food, construction and production sectors caused by the war in Ukraine are having an impact.

"There are more fields than we've typically seen via which price increases are reaching people," Eamets said.  "If we look at the general consumer price index (CPI), then yes, such price increases were last seen in the 1990s; we haven't seen such 10- and 12-percent price increases in a very, very long time. What we have to get used to is the fact that prices have now gone up, and they are going to remain more expensive."

On top of private consumers, expenses have increased for businesses as well. While forecasts called for a boost in consumption and increased turnover for businesses based on the spending of money withdrawn from second pension pillars, areas with lower incomes are very unlikely to see growth in consumption.

According to Ly Muttik, owner of the Pargi Store in Lähte, there has been a notable decrease in impulse purchases already.

"People definitely cannot allow themselves as much of some of the things they did before," Muttik explained. "We're seeing more of the basic staples: bread, milk and sausage."

Many families have likewise confirmed that they're being more selective about their purchases. Other households, however, had already pared their spending down to the bare minimum during the crisis, making it difficult to tighten the belt on their grocery shopping any further.

Triinu Jairus, a mother of six, said that her family is getting by even with the price increases, but based on the results of a questionnaire conducted among members of the Estonian Association of Large Families, many families have had to make significant changes to their living arrangements.

"What's sad is that they can't squeeze any more savings out of their daily spending," Jairus said. "Those have already been scaled back to the minimum and optimized, and so they start cutting back in other areas. They start cutting back on shared leisure time. Various field trips with the family are canceled because they can't think 'We're gonna go to the zoo in Riga' anymore — they have to look for places closer to home instead. Families have less freedom on that front than before."

In addition to food, fuel prices have likewise significantly driven up expenses. This is hitting families who need to drive their children from more rural areas to school or activities every day especially hard.

For example, for a family living in a more rural area, driving a child 15 kilometers to and from school each day alone means nearly €120 in gas each month. Those with several kids and school and activities at differing times, however, may end up spending even more. Many families have cut back on driving as much as possible, as well as put their kids on the bus instead, where possible.

Eamets confirmed that making changes to one's consumption patterns is inevitable, considering the increases in prices.

Focus should be on vulnerable groups

"Such a rapid increase in prices hits lower-income groups earning lower wages — below Estonia's national average wage —in particular," the professor explained. "This will certainly impact pensioners as well to some extent, as some things here are indexed to inflation, but wages and minimum wages aren't, for example, and I am indeed afraid that in the years to come, at least this year, wage growth will be superseded by price growth. Relative poverty may increase. We are unable to currently say to what extent, and this will also depend on how many support measures the state will be implementing."

The government is already considering possible support measures. According to Eamets, many other countries have thus far opted to reduce excise duty rates.

"If we consider the international experience, then the reduction of excise duty rates has been a relatively popular measure," he explained. "And not only excise duties — many countries have also employed reducing the VAT on certain basic goods, such as food. This is clearly a political decision and a matter of political choices; there are no right or wrong decisions here. We also certainly have to take into consideration as well that [Riigikogu] elections are coming up next year, due to which we can certainly expect some such decisions this fall, as political decisions along these lines are typically made ahead of elections."

While politicians may be tempted to make populist decisions in connection with elections, according to Madis Müller, president of the Bank of Estonia, care should be taken in compensating price increases for large swathes of society, and more attention should be paid specifically to supporting first and foremost the most vulnerable members of Estonian society. The former could inadvertently give price increases an extra boost instead.

Eamets believes that this fall may turn out to be one of the hardest yet, but added that the impacts of price increases may be mitigated by both support measures and job retention.

"As is typical of crises, it's always worth recalling the recommendation that one needs a job," the professor said. "The problems begin when people lose their jobs and stable incomes. As long as they have work and an income, then it is essentially possible to overcome all kinds of problems."


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Editor: Aili Vahtla

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