Data reported by the Bank of Estonia show that the yearly growth in the consumer price index did not change in December and remained at 4%. Inflation averaged 9.2% in 2023, which was in line with the forecasts. Prices for energy and food being lower has pulled average inflation in the euro area market down in recent months, and it was 2.9% in December.

Market expectations of rapid disinflation and a soft landing remain, but January has given a few new risks to the optimistic estimates of disinflation with no impact on the economy.

Eesti Pank forecasts that consumer prices will rise by 3.4% in 2024. The price level will be lifted at the start of the year by various tax rises. The impact of rises in VAT and excises is believed to be lessened by a falling price of natural gas in January and by seasonal sales of manufactured goods. However, higher electricity prices could be a driver of inflation in January as per season. Additionally, the ending of electricity as a universal service will make electricity prices more volatile for domestic consumers this year, and so make the total consumer price index harder to forecast. Hence, the future development of prices for oil and gas will depend on the performance of the global economy.

Additional risks come from the commodity complex and freight costs. Market participants have all but ignored the spread of geopolitical risk and assumed the extraordinary and counterintuitive decline in commodity prices in 2023 as something permanent.

Then a significant bounce in net liquidity and effective money supply both in the United States and the euro area. Thus, the following three months will be critical to understanding the real disinflation process and whether market estimates are too optimistic.

Last but not least, is the inflationary impact of government protectionism. As trade barriers continue to build, the monetary disinflation process may be decelerating due to governments implementing trade wars, barriers to commerce, and tariffs.

Core inflation without volatile energy and food prices is assumed to fall this year through both goods and services. The price level in Estonia stabilized in the second half of last year, but there has been no major fall in prices. The GDP shrinkage will cause some companies to cut their prices this year and reduce their production costs. Analysts identify space in some sectors for prices to be lowered at the expense of profit margins.

Food, commodities, and real estate inflation are all monetary effects. More units of newly created currency are going to relatively scarce assets. At the same time, deficit spending and the rising weight of government in the economy reduce the positive effects of monetary contraction and certainly decelerate the disinflation process. All these combined also contribute to the risk of a hard landing, especially when in a scenario of private sector recession.