The data from Statistics Estonia reported by the national bank show that prices were 1.9% higher in July than a month earlier, with inflation over the year reaching 22.8%. Energy prices were 87% higher than a year earlier, accounting for around half of overall inflation. Prices of food, including alcohol and tobacco, were up 17%, while prices of services were up 12% and those of manufactured goods were up 11%. Recession to cure inflation?

Businesses will have to cope with record-high energy prices. The price of natural gas will continue to reach new peaks in Europe and threatens to be much higher than it was last year. Natural gas is an important input in electricity production and in the production of food and construction materials. The high price of electricity means that businesses in Estonia will find it harder to compete in the Nordic countries, where electricity has recently been cheaper. On the other hand, household consumers will probably be able to buy energy at a lower price this winter, as the new government plans to compensate them for the part of the cost of energy.

Slower growth in the economy is believed to start to rein back the surge in inflation. Growth in retail sales and industrial output has slowed in recent months. It is supposedly harder for businesses to raise prices as the economy cools, as their budgets come under greater pressure and those facing difficulties need to cut costs. That’s why the narrative expects the rate of inflation to slow more generally next year. The prevailing assumption seems to be that the recession will cure inflation, however, the recent Eurodollar pivot has been driven by economic output data, not inflation (which remains at 40-year highs). This said it may take another elevated CPI print for this to set in. Unemployment has yet to budge. And when that moves the cake is baked.