Expert: Inflation will drop to single digits by year's end

Heido Vitsur.
Heido Vitsur. Source: ERR/Ülo Josing

Analyst Heido Virsur tells ERR in an interview that double-dip inflation will disappear by year's end. Vitsur considers various support measures to be costly and largely ineffective.

Estonians want to know why our prices are growing the fastest in the Eurozone?

One explanation is that our salaries are probably also growing the fastest. A matter of the balance of demand and supply. Our market is also among the smallest in the Eurozone and as such the most volatile, most sensitive to all manner of effects.

Is the war in Ukraine already reflected in price advance?

It is to some extent, as it has deepened disruptions caused at first by Covid and then global supply issues.

What will happen next?

There will be two factors in the coming months. It is to be feared the war will continue for some time, meaning these disruptions will continue to deepen. At the same time, summer brings lower demand for energy producers. Additionally, some shocks are due to the fact supply chains cannot be reshuffled quickly enough, while we are seeing signs of adjustment. The addition of an LNG quay somewhere is likely to alter the market and also affect us indirectly, driving inflation down. But the situations will remain complicated for some time.

Last year's price advance will start having an effect come fall. Prices had been suppressed for two years until Midsummer Day before they started edging upwards. By December, price advance had built up enough momentum. By autumn, the reference base will mean inflation will drop back down to single digits.

Estonia is a small economy and country, but what can we do to suppress price advance or would such measures be ultimately useless?

They would be expensive and useless in the long run. Let us look if only at April price advance. One reason it spiked so much compared to March was the end of various support schemes. They expired on April 1. The question now is how to implement such measures as someone needs to pay for them. Should they come as efforts to contain price advance or direct benefits and who should they be aimed at in that case? That is the question the government is faced with, while they can do little about the market. We could consider how to create energy reserves to be less vulnerable to current prices and rely on stockpiles. Especially during periods of strong price advance. But all of it for the future.

The debate in Estonia is over whether lowering energy excise duties, such as that on motor fuels, would add to inflation. What do you think?

Excise duties are a price component and can change prices and our competitiveness. When the duties were hiked too much four years ago, the market reacted very painfully. Estonia and our state budget gained nothing and business moved elsewhere. Therefore, excise duties have an effect, while one must always look at what one's neighbors are doing. We failed to do that last time and hurt ourselves.

Minister of Finance Keit Pentus-Rosimannus (Reform) says that slashing the duties would leave people with more money. They will consume more that will cause prices to grow elsewhere. Do you subscribe to this point of view?

I do to some extent as our price advance is faster than the rest of Europe's – salaries grew by 6-7 percent annually in a crisis. Prices were down at one point and growing by 1-2 percent again the next, with demand growing and supply suppressed causing pressure on prices. Excise duties do influence the market to some extent.

The normal market economy model tells us that if prices start growing too quickly, people's purchasing power falls that will in turn negatively impact suppliers and demand. In a situation where we have the war, are coming out of a long period of quantitative easing and have supply chain disruptions caused by the coronavirus crisis, does the system even work?

The problem is on the supply side today – there is less of it than demand. Demand is considerable because of support measures and wage advance. Easing has contributed to demand elsewhere, while supply cannot keep up because delivery disruptions and the war are hampering production.

However, rising prices will start to curb demand at some point?

They would if incomes would no longer grow as fast. But the uneasy air is making it difficult to rein in income.


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Editor: Marcus Turovski

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