In Estonia, the consumer shopping basket increased in price by 1.1% in July and was 5% more expensive than a year ago. The price level has risen by more than 2% in the last two months and inflation has risen, not only in the face of energy prices but also in relation to durable goods and tourist services. The main factor which turns on inflation is once again the rise in electricity and crude oil prices and the resulting rise in fuel prices. Energy prices were 22% higher than last year, accounting for about two-thirds of inflation. Bank of Estonia plans the imported natural gas price increase in the fall, with the heating of houses and buildings that will become more expensive. The level of crude oil prices has largely stabilized in recent weeks and it is hoped that this will prevent inflation from rising further than the current rate.

Annual inflation of industrial goods was 2.9% in July. Prices have risen rapidly for building materials, household furniture, and used cars. Estonian manufacturers are trying to cover their out-of-stock supplies with a record plant utilization rate of 81%, although material shortages prevent production from expanding. At the same time, discounts for clothing and shoes during July sales were greater this year than they were last year. Inflation in service prices has been supported by a recovery in tourism as the pandemic crisis eases. Data from Statistics Estonia show that holiday packages, airline tickets, and accommodation services were more than 20% more expensive in July than a year ago. While the overall increase in wages is no longer as slow as last year. Inflation will be maintained in the coming months by rising prices on the global market for raw materials and imported goods, but forecasts point to somewhat lower inflation next year than it is currently. Prices in Estonia rose by 3.8% over the year in June based on the national weights of the CPI, or by 3.7% based on the HICP flash estimate. Inflation was lower in neighboring countries, where the flash estimate of the harmonized price index in Latvia was 2.6%, and in Finland 2%.

At the same time, the increase in economic activity has increased inflation, since higher demand allows prices to rise more rapidly, while supply has not yet returned to pre-pandemic levels for all goods and services. Inflation is stimulated by the long shortage of supplies of goods. An increased labor shortage in some areas has caused price pressures for businesses. Prices rose rapidly in June for accommodation and restaurant services, and this can be directly linked to the easing of restrictions and the revival of the economy. Inflation is also high for clothing and footwear, but the price of food and soft drinks was more or less the same as it was a year ago. Inflation rates have been different in Estonia and neighboring countries, largely due to rising energy prices. This is unusual as similar factors affect energy prices in Estonia, Latvia, and Finland, and therefore energy inflation is not expected to differ much in the long run.

Most of the differences between inflation rates in Estonia and Latvia can be explained by the price of electricity. The exchange price of electricity in May and June was almost double that of a year earlier, which increased inflation by 0.8-1.1%. Although the dynamics of the exchange price of electricity are the same in all countries, the component of electricity in the consumer price index varies from one country to another, so electricity did not particularly raise consumer prices in Latvia and Finland in May, but did so in Estonia. This contradiction between the different indicators suggests that the differences are more methodological than essential, which means that inflation in Estonia and Latvia may not actually be as different for consumers as the statistics indicate. Inflation was even higher in Estonia in June, but moved differently in neighboring countries, slowing down in Finland and remaining stable in Latvia in both May and June.

In Latvia, fuel prices have curbed inflation. Several excise duties in Estonia are higher than those in Latvia, but this does not explain all the difference in price, as it is higher in Estonia even when prices are calculated without taxes. Diesel remains cheaper than in Latvia, and given the lower excise duty on diesel, Estonian consumers should benefit from an even wider price difference. However, the gap between fuel prices between Tallinn and Riga widened in spring 2020.

Unemployment in Estonia fell from 7.1% in the first quarter to 6.9% in the second one. Employment increased by 1.7% year on year but had already declined due to the crisis. The measures in place until mid-May this year to prevent the spread of the virus have not led to a decline in employment. However, employment growth at the beginning of the summer was below expectations. Data published by the Bank of Estonia show that the number of declared unemployed is also falling. This is due both to a lower number of new unemployed similar to the pre-crisis indicators in recent months and to the more active exit from unemployment, mainly thanks to the active search for a new job. This shows an increase in demand for labor, as also indicated by the large share of companies expecting employment growth according to the confidence survey of the Estonian Institute for Economic Research.

Although the unemployment rate is falling and employment is rising, the latter has not recovered much. The share of companies that see labor shortages as an obstacle to production expansion has increased rapidly, especially in manufacturing and services. This indicates difficulties in hiring new employees. And this may be due, in part, to the reduced motivation of those who became unemployed during the crisis to take up a new job in the face of unemployment benefits, especially in combination with the possibility of earning a small amount of additional income. The trend is particularly evident in the services sector, where employment is considered to be less secure than before. And increased labor shortages are driving upward wage pressures, where the average declared wage has grown fairly fast, both year-on-year and monthly.