Annual inflation in Estonia continued to slide from 11.3% in May to 9.2% in June. The Bank of Estonia vows that it will be below 5% in the second half of the year. The decline in inflation has largely come from prices falling for energy and a range of commodities. However, it will take time for the effect to pass through into the end prices of other consumer goods. It’s the money value that matters.

A large part of the rise in the cost of living in June came from food, as it had in previous months, and food prices accounted for around half of the rise in the price of the consumer basket. Prices of fruit and vegetables have risen most over the year, gaining about 35%, while meat and dairy products have increased by a little more than 15%.

How does inflation arise? The economists have two explanations ready. The first explanation is the “nonmonetary” one. According to this theory, sharply rising energy prices lead to inflation. This is referred to as cost-push inflation. Or inflation is caused by excess demand: the demand for goods exceeds the supply, causing prices to rise.

The second explanation for inflation is monetary. “Inflation is always and everywhere a monetary phenomenon”, as US economist Milton Friedman put it. In an economy without money, there is simply no inflation.

It is the increase in the volume of money and bank credit in relation to the volume of goods. It is harmful because it depreciates the value of the monetary unit, raises everybody’s cost of living, imposes what is in effect a tax on the poorest at as high a rate as the tax on the richest, wipes out the value of past savings, discourages future savings, redistributes wealth and income wantonly, encourages and rewards speculation and gambling at the expense of thrift and work, and undermines confidence in the justice of a free enterprise system.

Although CPI inflation in Estonia is falling and the average wage is growing fast, the purchasing power of wages has not yet returned to where it was before inflation took off. Real wages have been growing since September last year, but purchasing power may be expected to recover fully in 2025.

Data from the Tax and Customs Board show the growth in wages paid out exceeded 10% throughout the first five months of the year, and wages will continue to rise quite fast moving forward. It should be noted though that the rise in VAT will raise the cost of living further in the coming year and hold inflation at close to 4% while pushing the recovery in purchasing power somewhat further into the future.

Of course, assuming that the current conditions will keep stable. Unless pressure to increase current expenditures in areas like social and healthcare costs and national defense will mount over time, while the working-age population is shrinking. The cure for inflation, like most cures, consists chiefly in the removal of the cause. The cause of inflation is the increase in money and credit. The cure is to stop increasing money and credit. The cure for inflation, in brief, is to stop inflating.