Inflation stays high

The economist Raul Eamets said when commenting the steadily high inflation that if the wage rise continues it may increase unemployment.

Statistics Estonia reported yesterday that the consumer price index increased 3.5 percent in July over the year. Inflation, which had been low for a longer time, began to rise early last year and price rise reached four percent in June.

The economist Raul Eamets said that when wages go up, so do the prices. “It seems that the average wage growth this year will be 6.7 percent as well. It is difficult to say whether the wage growth will recede in the coming years; it will depend on the state of economy and the development of the outside environment,” Eamets said.

HE added that if economic growth will stay at 3.4 percent in the future and there will be no radical changes in migration policy, the wage growth is unlikely to slow down and inflation will remain relatively high as well.

“Besides price rise, wage growth bring along the disappearance of certain low-wage jobs; in other words, increased unemployment. On the other hand it will force enterprises to undertake technological innovation or replacing people with machines,# Eamets said. “The best example are the self-service tills.”

Regarding the effect of inflation on people’s behavior, Eamets pointed out that it depends on the perception of 3.5-percent price rise in everyday life, adding that the effect is clearly noticeable among certain groups of goods and services.

“This price rise was pushed by the rising cost of electricity and of motor fuel and alcohol, primarily due to higher excise tax. People consuming these goods have obviously noticed this change,” Eamets said.

According to Peeter Koppel, private banking strategist at SEB, Estonia’s inflation will stay higher than that of the eurozone inn the foreseeable future, since there are no quick solutions to the labor shortage problem and energy price will remain high as well.

Koppel said that Estonia’s small and open economy depends on the outside environment and reacts to it with a sort of amplification. “When our main economic partners enjoy economic growth, our growth will be higher as well. Under faster growth our inflation tends to speed up too,” Koppel said.

“In case of the services sector, it is primarily due to chronic labor shortage, which is especially apparent in the growth period, and the resulting wage pressure. And we “import” inflation from the outside environment via energy prices,” Koppel said.

“Since the outside environment is presently more or less favorable, the pressure for keeping energy prices high continues and labor shortage is known as a problem without quick solutions, out inflation will stay above that of the eurozone average in the foreseeable future.”

Goods became more expensive 2.9 percent and services 4.4 percent when compared with July 2017. The administratively regulated prices of goods and services have increased 10.1 percent since last July and those of nonregulated goods 1.7 percent.

Compared with July 2017, the consumer price index was influenced the most by housing expenses, which amounted to almost one third of the overall rise. More than half of it in turn was caused by the rising cost of electricity consumed at home by 16.9 percent.
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