In Estonia, consumer prices rose 21.9% in June over the year, energy contributing half of the total inflation just like in previous months. The rise was driven most by electricity prices, which remain high despite summer. It must also be taken into account that the impact of energy on consumer prices is greater in countries, where it makes up a larger share of the consumer basket. Compared to Estonia, the share of energy in the consumer basket is higher only in Latvia. Food prices provided a quarter of the total annual inflation as a result of growing commodity prices and the energy prices passing into food prices with a slight lag.

At the same time, inflation is broad-based in Estonia. Core inflation (excluding energy and food prices) has been one of the fastest among EU countries over the last months, rising 10% in June. In cross-country comparison, a positive correlation is evident between household disposable income and prices: countries with higher core inflation have also seen faster growth in deposits during the pandemics. Restrictions on consumption and entertainment in the past two years contributed to the growth in deposits, which households started to spend rapidly once the restrictions were relaxed. Estonia also stands out for its pension reform in autumn 2021, which enabled people to take their money out of the second pension pillar, leading to a large additional money flow for households.

Increases in the money supply through the exchange of nothing for something divert wealth away from wealth generators towards the holders of the newly generated money. This is what sets in motion the misallocation of resources, not price rises as such. Real incomes of wealth generators decline not because of general rises in prices, but because of increases in money supply, which diverts wealth. For instance, when money is generated out of “thin air,” the holders of the newly generated money can divert goods to themselves without producing anything themselves. As a result, wealth generators who have contributed to the production of goods discover that the purchasing power of their money has fallen since fewer goods are left in the pool. Once wealth generators have fewer goods at their disposal, this hampers the further formation of wealth. And, as a result, economic growth is going to come under pressure. General increases in prices, which follow increases in money supply, only point to an erosion of wealth. It’s the increase in the money supply and not the increase in prices that erodes the real incomes of pensioners and low-income earners, who tend to have fixed incomes, and are the last receivers of the newly pumped money.

According to some economists, once individuals start to anticipate higher inflation in the future, they raise their demands for goods at present thus bidding the prices of goods higher. While businesspersons take into account various costs of production when setting prices, the final decision maker as far as the price of a good is concerned is the consumer. The consumer determines whether the price set is “right,” so to speak. If the money stock did not increase then consumers will not have more money to support a general increase in the prices of goods and services. So irrespective of what individuals’ expectations are, if the money supply did not increase, then individuals’ monetary expenditure on goods cannot increase either. This means that no general strengthening in price increases can take place without the increase in the pace of monetary pumping, all other things being equal.

Energy prices will remain high, affecting also the prices of other services and goods. The official narrative expects a more notable easing of inflation at the beginning of 2023. Money to the value of 7% of GDP has been added to the Estonian economy in the past two years, in addition to the pension reform mentioned above. Hope is the last to die.