Written by 7:00 am Europe Economy

‘I am not blaming anyone’: Estonians shrug off 23% inflation | Estonia

Like his cappuccinos, Taniel Vaaderpass, 33, isn’t bitter. His usually profitable company, OA Coffee, one of Estonia’s biggest coffee bean roasting companies, may have posted a loss for the first time last year and is set to do so again this year, but Vaaderpass remains strikingly sanguine as he sits on the terrace of the cafe he also owns on a cobbled street in the old town of Tallinn.

The central causes of Vaaderpass’s misfortune is a 240% increase in the price of unroasted green coffee and a 20% surge in the cost of the gas he uses to roast his imported beans. He also felt the need to give his staff a 10% pay rise in January despite the lack of company profits.

This is the reality of living in Europe’s inflation hotspot. The latest figures, published on Thursday, showed that Estonia has an annual inflation rate of an astounding 23.2% – the highest in the eurozone, vastly outpacing the average of 8.9%.

Vaaderpass is inevitably part of the cycle. He has raised his price to supermarkets by 25% over the last eight months and he fears he will have to do so again this year. A coffee in his cafe is today half a euro more expensive than it was, and Vaaderpass says he will also have to cut costs to get “back on track”.

But he is not on the streets calling for the government’s downfall. No Estonians are. Indeed the latest polling has the Reform party, the largest party in the ruling coalition, flying high with 34.4% of the vote, and their conservative rivals on 21.3%, six months before the national elections.

“Estonians are not that temperamental,” Vaaderpass says. “Calm northern people. No emotions, you know. The joke is that when Covid hit and people couldn’t meet, it was a lucky day for Estonians. Celebration day.”

A woman picking nectarines at Balti Jaama market in Tallinn.
A woman picking nectarines at Balti Jaama market in Tallinn. Photograph: Hendrik Osula/The Guardian

Part of the explanation for the lack of a political backlash may be that Estonian salaries have been on a sharp upward trajectory for several years and the economy recovered well and quickly from the Covid pandemic, leading to labour shortages and higher wages. Voters are relatively relaxed about a temporary period of higher prices, it is suggested.

But there is also an understanding in Estonia, once part of the Soviet Union and containing a large Russian-language minority, that the war in Ukraine is the source of many of their problems, says Kaspar Oja, an economist at Estonia’s central bank.

“In many countries people have gone to the streets even with lower inflation rates, but here people are quite calm,” he says. “Of course there are people who complain, but most people understand that the increase in energy prices is broadly related to the war and they understand what it is behind it.”

There is, however, something percolating, he admits.

Estonia’s standout inflation rate is also due to some peculiarities in its economy, and potentially some governmental missteps that may be seized upon. Recent pension reforms have allowed people to dip into their nest eggs to spend now rather than later. A large proportion of consumers are on energy deals that are linked to the market price rather than fixed.

And the newspapers are increasingly full of complaints about how Estonian energy producers, with relatively low production costs, are racking up high profits as they raise their prices in line with other regional producers in the Nord Pool exchange via which electricity is shared and prices set. Estonia remains a relatively poor country within the EU, and so energy and food prices make up an oversized part of consumer spending.

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“Lately there have been more complaints about the electricity because they can see companies have benefited from it,”Oja says. “Consumers are paying more but Estonia has energy producers which are benefiting pretty well and people are not happy about that. That is why the government is planning to have a universal electricity service for small consumers, mostly households, to take effect from October. The electricity companies will have to sell electricity according to the production costs.”

It is also, however, starting to be noticed in the media how little the prime minister, Kaja Kallas, who has spoken of the need to keep tight control over spending, has offered in terms of mitigation on energy prices.

Jacob Kirkegaard, a senior fellow at the Peterson Institute For International Economics, says the latest inflation figures show that the more interventionist governments, such as the French, with the lowest annual inflation rate in the eurozone at 6.8%, and the Italians (8.4%), have done best in shielding their voters from the inflationary pressures.

“The underlying issue is that the Estonians haven’t done very much,” Kirkegaard says. “The French have been largely insulated because of the nuclear production and they haven’t had nearly the same pass through. This is unlikely to last because if you look at the forward energy pricing in France, it is higher than most of the rest of the Europe as the fear is that the river levels are so low that they will have to take the nuclear plants off the grid because they will not have the water to cool them.

“But the government has done quite a lot. They have nationalised EDF [the country’s largest energy company] fully and it will do what the government wants. They have also raised public benefits to low-wage people by up to 10% to basically try to mitigate the cost of living for low-income groups.”

Baristas
Baristas Elizabeth Liiv (left) and Anastasia Kralle at OA Coffee cafe say the understand why prices are rising. Photograph: Hendrik Osula/The Guardian

The link between lower inflation rates and intervention should not be lost on Boris Johnson’s successor in the UK, Kirkegaard suggests. According to data released by the Office for National Statistics this week, consumer price inflation in Britain jumped to 10.1% in July, the highest since February 1982, making it the first major economy to see price growth hit double digits.

“My sense is that the UK when it comes to fiscal transfers or direct government help hasn’t done much compared to the continent, certainly southern Europe and France and the pass through of costs has been much larger,” he says. “I would say the UK is one of the least activist major governments.”

It is yet to be seen whether British voters will be as relaxed as those in Estonia. In central Tallinn, Lisa, 34, a psychotherapist picking up some fruit at the covered Balti Jaama Turg market, says she is buying fewer cosmetics and opting for secondhand clothes over new ones, but is more concerned about the fate of Russians and Ukrainians than that of the Estonian economy. “I feel sad about that rather than angry,” she says.

Anastasia Kralle, 21, and Elizabeth Liiv, 17, serving at the OA Coffee cafe, agree. “I have noticed the price of eggs keeps on going up, every time I go to the shops,” laughs Kralle. “Yes, everything is more expensive, but I don’t want to be angry. I am not blaming anyone, we all know why it is happening.”

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