Bank of Estonia: Impact of the war in Ukraine has reached inflation

€100 and €200 bills.
€100 and €200 bills. Source: Siim Lõvi/ERR

Consumer prices were up an average of 18.8 percent on year in April, with rising energy prices joined by supply problems and very strong demand in driving inflation in Estonia. The impact of Russia's war in Ukraine has reached inflation as well, the Bank of Estonia said Friday.

While prices were on average 3.5 percent higher than in March, consumer prices were up 18.8 percent on year, according to a Bank of Estonia press release. One cause of higher inflation was support measures intended to ease the impact of rising energy prices ending in March. As a result, the price of natural gas went up 87 percent, heat 58 percent and electricity up 29 percent.

Energy prices nonetheless only accounted for half of total inflation in April, as the rise in prices of manufactured goods and services, which averaged 10 percent on year, had the same impact. This meant that consumers' expenditures increased over a broad base, with rising energy prices joined in driving inflation by supply problems and very strong demand.

Higher import prices also meant that costs for companies increased rapidly, which will cause broadly based inflation to persist. Higher prices for the inputs needed for production are a danger above all for exporting companies, as it is more difficult for them to pass higher costs on to prices. Statistics for export prices indicate that production of processed foods and of furniture have thus far coped with rising input prices. Terms of trade for the production of chemicals, construction materials and clothing, however, have deteriorated somewhat.

The disappearance of the Russian market for some manufactured goods could also lead some companies in the EU to start to lower prices, Estonia's central bank said.

Rapid wage growth and strong demand are also pushing prices up. Demand from consumers has remained strong, as data from the Estonian Tax and Customs Board (MTA) indicates that wages paid out in March were around 11 percent higher than in March 2021. Households also built up large additional savings during the pandemic, and some money withdrawn from second pillar pensions has been directed into consumption. The strength of demand is indicated by firm growth in retail sales, especially for manufactured goods,as retail sales in March were up 36 percent on year.

Domestic inflation pressures are expected to ease a little, however, as economic activity will decline due to the war in the short term.

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Editor: Aili Vahtla

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