Yearly inflation slowed to 17.6% in December according to the Bank of Estonia. Food products, which include alcohol and tobacco, were 25% higher in price, while prices were up 24% for energy and 12% for manufactured goods and services. The price level was 0.1% lower than in November. But it’s when businesses cannot raise prices as fast as before, that people are laid off.

The data for December does not yet show any indication of the rise in food prices easing. Some sign of inflation slowing was however given by a sharp drop in the price of butter and powdered milk on the EU market in recent weeks. Such a drop is believed to be followed sometime later by slower growth in consumer prices. The broadly based fall in energy prices on commodities markets continued in December. Energy prices have been falling since August and have also been facilitated by the warmer weather.

The loss of purchasing power of wages is increasingly expressed in cautious demand. Consumers have not been able to keep pace with inflation in recent months, and retail sales volumes have started to fall. The sharp drop in industrial output indicates that businesses are not able to raise prices as fast as before. The number of companies planning to reduce staff numbers has consequently overtaken the number planning to hire additional staff.

Inflation fell in December in the larger countries of the euro area by more than expected. However, the risks from the external environment will remain large moving forwards, as inflation was kept down to a large degree by the temporary measures taken by governments to rein it in. Central banks are equally continuing to raise monetary policy interest rates to reduce inflation.

At the same time, the latest flash estimate put the Estonian current account at 72 million euros in deficit in November 2022. Exports of goods increased by 4% and imports by 15% over the year, so the deficit in the goods account increased by 181 million euros to 241 million euros. Contributors to the growth in exports were exports of mineral products and food goods, while exports of wood and wood products, and metal and metal products declined. The growth in imports was driven by imports of mineral products and food goods.

The export of services was up by 14% over the year and imports by 24%, so the surplus on the services account decreased by 34 million euros to 170 million euros.

In this scenario, the Estonian economy was a net borrower in the third quarter by 177 million euros. Households and financial institutions were net borrowers, while non-financial corporations and the general government were net lenders.

The use of foreign subsidies for investment in infrastructure increased the surplus on the capital account and pulled the balance on the current and capital accounts into surplus by 69 million euros. However, a large drop in portfolio investment claims and other central bank liabilities on the financial account was a consequence of credit institutions repaying monetary policy loans.

The consolidated debt of the Estonian economy grew by 2.3% in the quarter, while the yearly growth in it was around 10%.