Estonian economist: 2% inflation is nearly ideal indicator
According to Luminor bank's chief economist Lenno Uusküla, Estonia's annual inflation rate of 2% is nearly ideal, reflecting weak domestic demand and functioning market mechanisms.
Estonia's average annual price growth has reached 2%, which Luminor bank's chief economist Lenno Uusküla considers nearly ideal. According to the harmonized index of consumer prices, the decrease in inflationary pressure is due to several factors: cheaper fuel, falling global raw material prices, and active discounts on food and clothing in retail chains.
Uusküla notes that 2% inflation is practically ideal, given that the European average is slightly higher. Estonia's economy has not been performing very successfully recently, so domestic demand remains weak, and internal inflationary pressure is low. Excluding the impact of tax increases and other administrative changes, actual market price growth has been quite low even earlier.
Not all goods and services have become more expensive. For example, insurance and financial services have fallen by more than 7% over the year, clothing and footwear by more than 6%. Prices for food, catering, accommodation, and some types of leisure have also decreased. On the other hand, alcohol, tobacco, housing, and education costs have risen significantly.
Overall, these data show that market mechanisms continue to work. Against the backdrop of restrained consumer demand, businesses find it harder to pass on their costs to buyers, so the possibilities for price increases remain limited.
After a period of high inflation, it is clear that although overall price growth in Estonia was comparable to Latvia and Lithuania, the main role here was played by tax changes. Without them, inflation in Estonia in recent years has been significantly lower than in neighboring countries.
First signs of economic recovery are already visible. Many expect that as consumer activity rises, inflation will accelerate again. However, Uusküla says this will likely happen later rather than sooner. Currently, the economy has enough free resources. Inflationary pressure occurs when demand grows faster than supply can meet it. Many companies, for example in services, tourism, and restaurants, have the capacity to serve more customers. Restaurants are more likely to close than to open, so an increase in customers would primarily help existing establishments stay afloat, rather than lead to a sharp supply shortage and price spike. At present, there are no preconditions for such a tense situation.
