According to Statistics Estonia calculations, prices in Estonia have risen by around 40 percent over the last three years. This indicates how much the agency calculates the cost of a basket of consumer goods and services as having gone up; it does not, however, reflect all of the increase in the cost of living. Real life has gotten more expensive for a significant number of people.

Namely, Estonia's consumer price index (CPI) does not include an interest rate component. According to the country's latest, 2021 Household Finance and Consumption Survey (HFCS), 47 percent of Estonian households have a financial obligation. A total of 23.7 percent of households have a real estate collateral loan, such as a home loan.

Interest rates for almost all holders of obligations have gone up in recent years as a result of the surge in Euribor, or Euro Interbank Offered Rate, base rates. Monthly mortgage payments have increased markedly, the cost of leasing a car has gone up and so on – and inflation doesn't reflect any of it.

The fact that interest rate hikes are not taken into account in turn means that when calculating the change in real wages – which is nominal wages adjusted for inflation – the result ends up being rather misleading. In reality, real wages are actually lower by precisely the unmeasured reduction in welfare.

Bank of Estonia economist Kaspar Oja told ERR that the CPI doesn't measure cost of living, and that some other method should be used to do so. He did, however, note that typically, an increase in CPI is a fairly good indicator of an increase in the cost of living, with the exception of when sudden changes occur.

Statistics Estonia senior analyst Lauri Veski said that Statistics Estonia bases its calculation of the CPI on the Harmonized Index of Consumer Prices (HICP) methodological manual, according to which interest, service fees and late fees are not reflected in the prices of credit agreements.

Of course, this doesn't mean that all statistical offices in the world do the same. Ireland's Central Statistics Office (CSO), for example, takes not just interest but even also things like changes in property taxes into account when calculating its own consumer price index.

At the EU level, only the HICP is considered partly in order to make the indices comparable. Estonia's consumer price index is thus fairly similar to the Harmonized Index of Consumer Prices.

In Estonia, price recorders report pricing information on a monthly basis, visiting stores in person as well as browsing prices online or surveying by phone in across ten regions. It takes eight people working full time to do this.

700 representative goods tracked

Prices are recorded for both goods and services. Each month, price recorders should go and write down the prices of the same products as the previous month. By aggregating these prices later, Statistics Estonia can see how much certain prices have risen during the previous month.

This means that a price recorder doesn't choose the cheapest product in a particular product group, but rather sticks to monitoring the price of the same brand they always have. Should a specific product be discontinued, only then is another substituted in its place. In all, Statistics Estonia tracks up to 700 representative goods, which collectively should paint an overall picture of price increases in Estonia.

"We try to maintain some degree of stability in the selection of goods," Veski said. "So that we can always still compare the same thing with the same thing."

While Statistics Estonia monitors product prices on a monthly basis, in order to understand how much prices have gone up for consumers, the statistics office likewise needs to determine consumption patterns, i.e. how much the average Estonian household spends on goods and services.

Consumption patterns, or weights, are determined by Statistics Estonia once a year, in December. This is done based on consumer surveys as well as other inputs, including expert evaluations. These weights remain in place for a full year, unchanged by the statistics agency.

Electricity prices drive up inflation

Even so, when prices change rapidly or other situations arise that significantly impact society, such as the COVID-19 pandemic, these weights may lag behind actual consumption patterns as the year wears on. However, merely making these weights more precise can have a significant impact on the CPI.

One such example of this is electricity prices and their inclusion in the CPI. The Bank of Estonia, the country's central bank, has long since noted that including the price of electricity has led to markedly overstated inflation numbers.

Oja says that it is possible that the incorrect calculation of electricity prices may have overinflated Estonia's CPI by even as much as one percentage point.

"The presentation of the Bank of Estonia's latest forecast included a diagram comparing Nord Pool prices and electricity prices in the CPI," the economist recalled. "Placed next to this was the so-called real wage index, where Nord Pool's price index was used for electricity prices in lieu of official price statistics. There you could see that this effect is quite strong."

Veski at Statistics Estonia said that the agency hasn't miscalculated anything, but admitted that it is possible that the methodology didn't best fit a situation where electricity prices changed suddenly and significantly. Even so, he believes things should be back to normal by now.

Statistics Estonia does not want to say much about what goods and services they base their consumer price index on. HICP weights by European country, meanwhile, can be found on the Eurostat homepage.

Fiddling around a bit, it's possible to figure out that in Estonia in 2024, food and beverages account for 21 percent of its HICP. Or, in more detail, that butter, for example, will account for 0.27 percent. Movie tickets, on the other hand, are weighted as 0.7 percent of the total index.

In total, there are 468 items included in Eurostat's HICP, some of which include other groups, and some of which have zero weight in Estonia.

Last week, Statistics Estonia published some of its own CPI weights. These include 12 major groups, of which groceries have been made publicly available by agency.

Statistics Estonia has declined to say which goods, services or products it monitors.

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