Economic Research: Shops chaotically add anticipated tax hikes to pricing

Shopping basket.
Shopping basket. Source: Priit Mürk/ERR

Peeter Raussepp, director of the Institute of Economic Research, said that the upcoming increase in the value-added tax will not cause prices to shoot up on January 1 – they are already rising gradually and chaotically.

The Estonian Institute of Economic Research has calculated the cost of a weekly food basket for a family of four in Estonia based on the fundamental products they purchase for the past 31 years.

In previous years, the price of the food basket increased by a few euros per year, but since 2021 it has risen at an accelerated rate: in 2021 it cost €82.14, in 2022 it cost €103.72, and in September of this year it cost €116.28. It is anticipated that next year's increase in the value-added tax (VAT) will further increase prices.

The director of the Estonian Institute of Economic Research, Peeter Raudsepp, told ERR that prices will not stagnate until the next VAT increase, but they have begun to increase already and will continue to rise in a rather chaotic way.

"Sellers are looking for possibilities to where more could be added and where less. But I'm convinced that it's not in the interests of the merchants in the world to take this tax increase on themselves. Retail sales show a steady downward trend, i.e. the volumes of goods sold are decreasing. The supermarket chains cannot lose their profit margins, as this would lead to an immediate drop in profits, if not losses," he said.

According to Raudsepp, prices will continue to rise. The last two years have seen a shockingly rapid increase in food prices, but if you examine the cost of food baskets over the years as published by the Institute of Economic Research, you will notice that prices have also declined, but the decline has never been maintained.

"So as not to be overly disappointed, let's not expect prices to fall," he went on to say. "Talking about lowering prices is just more marketing." These reductions do not go much further than the price labels on promotional products, and if we have measured these reductions, this basket of food, for example, has now reduced by one euro from €117 to €116 compared to the previous quarter. In fact, the price drop has been statistical, meaning that only the Institute of Economic Research is able to measure it; it has nothing to do with the buyer's stance or wallet."

Raudsepp said that prices will continue to rise next year, but not sharply. Despite the fact that some costs, such as energy and some raw materials, have decreased since their peak in 2022, there are still high to continue driving up prices. He cited as examples the anticipated increase in the VAT rate, the rise in labor costs, and the rise in interest rates.

Cost of a food basket from September 1993 to 2023, in euros, for a family of four in one week, for the basic food items. Source: Estonian Institute of Economic Research

Regarding the price movements of food baskets in the future months, he said that moderate growth is more probable, but the time for major shocks and substantial price increases has passed. Despite the increase in the rate of the value-added tax from 20 percent to 22 percent in the new year, consumers should not be expecting significant price increases in stores.

As a consequence of price increases, buyers who previously favored Estonian goods are now opting for cheaper alternatives from other countries. The demand for Estonian goods has reached an all-time low as a result of consumers' price sensitivity. As interest expenses consume a larger portion of family budgets and the standard of living declines, Raudsepp predicts that this trend will unfortunately continue.

According to him, the entire chain should be combating this trend, as it is in everyone's best interest for more Estonian products to be consumed, and it is not only a matter of patriotism to do so.

"That money stays in Estonia, it pays salaries to Estonian people and those same Estonian people go shopping," he said.

Raudsepp stressed that it is difficult to make forecasts because the root causes of the current problems are not economic. It is not the ups and downs of the economic cycle, but political development - war and sanctions. Looking at the recent past, there have been a series of crises - the security crisis, the energy crisis, the pandemic crisis - and the crises show no signs of abating.     

"We don't know where the next war will break out, how it will affect global energy prices, which act of diversion will follow it, or even if and how much interest rates will be hiked," he said.

Despite his reluctance to be optimistic, according to Raudsepp there are some positives nevertheless, such as a slowdown in the decline of prices, a labor market that has performed exceptionally well thus far, and companies that are adapting and recognizing a greater need for innovation.


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Editor: Kristina Kersa

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