Inflation has been falling since September last year, the Bank of Estonia says, adding that it forecasts a rate of under 5 percent in the second half of this year.

However, while inflation is falling and average wages are growing rapidly, the purchasing power of wages has not yet returned to the levels it had been prior to Estonia's inflation starting to soar.

Real wages have been growing since September last year, but purchasing power maynot be expected to recover fully until 2025, the central bank says.

Data from the Tax and Customs Board (MTA) show the growth in wages paid out exceeded 10 percent throughout the first five months of 2023, while wages will continue to rise quite rapidly in the future.

It should be stressed, the Bank of Estonia says, however, that the rise in VAT will exert upward pressure on the cost of living further in the coming 12 months, hold inflation at close to 4 percent and punt the recovery in purchasing power somewhat further down the road as noted.

The central bank says the fall in inflation is largely the result of falling prices in energy and a range of commodities, which nonetheless take time to translate into lower inflation in end-products, end-products whose input costs have fallen.

As in previous months, food prices in June were dominant in the overall inflation figure, accounting for around half of the rise prices in the basket of goods.

Prices of fruit and vegetables have risen most over the year, by about 35 percent, compared with a little over 15 percent for meat and dairy products.

Food prices are also continuing to fall, while agricultural commodities are cheaper which, together with lower energy costs, will combine to reduce the upwards price pressures of this group of goods in future.

Exceptions to this are sugar and meat, for which the prices on global markets have started to rise again in recent months.

The general price level of food goods is around a quarter below its peak of last year, and cheaper commodities are just starting to have an impact on retail prices, the central bank says.

Corporate profits have grown handsomely from consumer spending, the Bank of Estonia adds.

The central bank estimates that around 40 percent of the rise in the cost of living in the first quarter came from an increase in price margins, though this proportion was even larger last year.

Companies can, however, no longer rely on very lively demand to give their profits a healthy boost, though companies in various sectors managed to make use of that opportunity to very different extents. The ability to increase profitability has been notably squeezed because the effect of the demand encouraged by the money saved during the pandemic and withdrawn from the second pension pillar has receded, while higher interest rates are now clamping down more on demand. The cost pressures caused by the energy crisis and supply pressures have also eased, meaning that general inflation will fall further in future, the central bank concludes.

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