Data from Statistics Estonia shows that prices have continued to rise in recent months, driven primarily by food and non-alcoholic beverages.

Peeter Raudsepp, director of the Estonian Institute of Economic Research, said there are several reasons behind rising food prices. First, a large share of food products are imported and the volume of imports is growing. This increases the trade balance deficit, but it also means that prices of food in Estonia are increasingly influenced by global market prices.

"Second, these rapidly rising prices have — repeatedly and over the years — been further fueled by our own tax increases. This was already pointed out two years ago: unfortunately, tax hikes accelerate inflation and prolong economic downturns. That warning has turned out to be true and we still haven't stopped. We're raising taxes even more," he said.

As a third factor, Raudsepp pointed to the economic model, noting that retail sales volumes for food products have been declining since the first quarter of 2022, with the downturn only beginning to level off in recent months.

"This means retailers' sales volumes are not growing — they've been consistently shrinking. At the same time, costs for energy and wages are rising and all sorts of new regulations are further increasing those costs throughout the entire supply chain," he explained.

According to the director of the Institute of Economic Research, prices for some products have increased by more than 40 percent. A value-added tax hike is set to take effect on June 1, but Raudsepp emphasized that the VAT increase is not the only factor behind the rise in food prices.

He noted that prices are always in flux — they go up and down — just like profit margins throughout the supply chain, from farmers to food producers to retailers. This fluctuation is entirely normal. The VAT increase does not mean prices will remain fixed until the end of June and then rise by exactly 1.7 percent on July 1.

Prices will go up by Midsummer

"Demand and various sales campaigns also affect prices, but my sense of the situation has always been that prices are already rising and will continue to do so. We may well find that around Midsummer, when we head to the countryside, we'll be shopping at higher prices — because demand is up, and let's face it, no one has the time to check prices or hunt for cheaper options," said Raudsepp.

He noted that in its surveys, the Institute of Economic Research divides consumers into four income groups, with the fourth representing the highest earners.

In recent years, according to Raudsepp, the confidence index among these income groups has diverged significantly — people in the highest income group feel much more secure in the current situation than those in the third, second or first groups. At the same time, it's no longer accurate to say the problems are limited to those with low incomes.

"People who are on tight budgets are the ones facing problems. That includes middle-aged individuals with children, good jobs and advancing careers. They have kids to raise, extracurricular activities to pay for, clothes and shoes to buy, mortgage payments to make and sometimes one or even two car leases on top of it all," Raudsepp explained. "That's where the problem comes in — when the cost of basic necessities rises so quickly, there's nothing left over for anything else."

Last year, 15 percent of surveyed households said they were struggling to cover their daily expenses. That figure has now risen to 20 percent and forecasts suggest it could grow to 25 percent of households.

Planned purchases canceled as there's simply no money

As a solution, families are turning to saving, using up previous savings and unfortunately also taking on consumer loans.

Although the average wage has increased, the director of the Institute of Economic Research pointed out that this has primarily benefited those who were already earning more. Therefore, consumers — whose purchasing power has clearly declined — should not be blamed, as if they ought to still have enough money. Consumers lack confidence, and as a result, they are reluctant to spend.

"When purchases don't happen, it's because the money isn't there. If we look at retail turnover, we saw — sometime in the first quarter — that department store sales declined, durable goods sales declined and food sales declined. But sales increased at markets, kiosks and secondhand shops. That doesn't reflect a lack of confidence — it reflects a lack of money," Raudsepp emphasized.

He added that the share of Estonian producers in retail chains has unfortunately been decreasing year after year and there's reason to believe that this decline is now accelerating. But a country cannot rely solely on imports; it must grow much of its own food or else it will destroy its own economy.

"What are we leaving behind for our farmers and food industry? This is a long-term and cumulative negative trend. If we set this process in motion, we're making a serious mistake," Raudsepp said.

Asked whether we might see light at the end of the tunnel this year, he replied that while there is talk of the economy "picking up," there is no real reason to speak of economic growth. The growth seen in the fourth quarter of last year was an anomaly, and only time will tell what the future brings.

"'Picking up' isn't actually an economic term — it can't be measured, it has no unit. It can only be described through other indicators. The thing that's really picking up right now, unfortunately, is price growth. That process, sadly, is accelerating," Raudsepp said.

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