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Luminor economist: Merchants raised prices more broadly in wake of VAT hike

Lenno Uusküla.
Lenno Uusküla. Source: Priit Mürk/ERR

Merchants took advantage of the VAT hike that came into force in January to more broadly raise prices, even as commodity prices on the world market have continued falling for two years running now, Luminor chief economist Lenno Uusküla said Wednesday.

"Considering that costs have gone up and costs are continuing to go up, this VAT hike then gave merchants the grounds [to do so] – overall pricing was in fact changed along with it, not just the VAT component," said Uusküla.

"Food is very seasonal," he explained. "Some foods are in fact cheap when they're ready, and after that they're expensive. Take away this seasonal fluctuation and the increase in prices on month remains 1.7, which is actually precisely the VAT's worth. These prices have been raised in the past, however, and surely not all prices have been increased yet."

There's also an element of added price pressure evident here that isn't linked solely to the VAT, the economist continued.

"If you look at the world market, food commodity prices have been falling for nearly two years running now," he said. "Prices are at the level they were at the beginning of 2021. A major change has taken place there, actually. For us, the change is that wages have gone up. And of course that increases farmers' expenditures."

Asked by ERR whether being in an economic crisis could help curb the increase in the prices of services, Uusküla replied that initially, the prices of services will go up precisely because they didn't increase during the period of major price increases.

"Good prices increased much more than the prices of services," he pointed out. "And now the prices of services are simply catching up to the prices of goods."

The chief economist noted that services count for a significant share of wages, and that wage increases continue to be expected as well.

"As long as wages continue to go up, so will the prices of services; they're very closely linked," he said.

In light of the economic crisis, there is surprisingly little pricing pressure on both goods and services that could drive prices down, Uusküla observed.

"It's surprising how persistently these prices remain high and how they still continue to rise," he said.

He said that people don't understand what is and what isn't a reasonable price, and they err as a result.

"People don't know what to pay and what not to pay," Uusküla explained. "This ability to decide on the fly has been significantly diminished compared with before because they can't recall such reference prices. And consumers don't vote as much with their wallets; they accept the circumstances they're in at the time."

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Editor: Aili Vahtla

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