Bank of Estonia: Wages, inflation being affected by economic downturn

Bank of Estonia economist Orsolya Soosaar.
Bank of Estonia economist Orsolya Soosaar. Source: Bank of Estonia

Average wage growth in Estonia remained strong late last year despite a contraction in the economy, however inflation has been slowing, as this economic downturn and a fall in demand have meant that many companies are no longer able to raise their prices as quickly as before, according to Bank of Estonia economists Orsolya Soosaar and Sulev Pert.

The average gross monthly wage in Estonia stood at €1,775 in the fourth quarter of 2022, marking an increase of 9.2 percent on year, Soosaar said according to a press release. Although the economy contracted at the end of last year, average wage growth nonetheless remained strong. Wages' purchasing power, however, was lower over the whole of last year than it was in 2021.

If the economy had not contracted, high inflation would have pushed wages to rise even faster. THe growth in wages is affected by the economic climate deteriorating, which makes companies less inclined to hire. This is indicated in the sentiment survey conducted by the Estonian Institute of Economic Affairs as well as by the fall in employment.

Inflation could be under 10 percent by summer

Data released by Statistics Estonia on Tuesday indicated that annual growth in the consumer price index (CPI) had slowed to 17.6 percent in February, with inflation peaking last August at 25 percent and coming down since. Energy prices have fallen steadily in recent months, and the market prices of gas and electricity are now back to where they were in September 2021. February price levels were 0.6 percent higher than in January as food and services put pressure on prices.

Commenting on these figures, Pert said that a contraction in the economy and a fall in demand mean that many companies are no longer able to raise their prices as fast as before. The outlook for inflation is uneven across sectors as well.

Data from the Estonian Institute of Economic Affairs shows that companies' price expectations have dropped sharply in manufacturing as demand for exports has weakened. Surveys show that only a few companies in retail and services expect prices to fall in the months ahead. Domestic inflation, he noted, is being driven by rapid growth in wages and the low unemployment rate.

According to the central bank economist, inflation is expected to continue falling steadily throughout the year, and should be under 10 percent by this summer. Estonia's inflation rate for 2023 as a whole, however, should still remain around 9 percent.


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Editor: Aili Vahtla

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