In the summer, when traveling to other countries, many Estonian residents see with their own eyes that the same things or services in other countries cost at least the same or even cheaper, and ask a logical question: why and how we ended up in a situation that, compared to the rest Has everything become so expensive in Europe? /nginx/o/2023/05/08/15306465t1h858a.jpg)
Empty wallet. Photo: Emil Kalibradov/ Unsplash
In the summer, when traveling to other countries, many Estonian residents see with their own eyes that the same things or services in other countries cost at least the same or even cheaper, and ask a logical question: why and how we ended up in a situation that, compared to the rest Has everything become so expensive in Europe?
According to public opinion research, recently more and more people feel insecure about their financial affairs. The reasons for this lie in the recent price race, the decline in purchasing power and what is happening in the political arena. In fact, all the money that was previously sufficient has disappeared from our wallets. Prices have increased significantly and at once for everything, and in addition, interest rates on mortgage loans have increased.
What is happening to prices and why?
Now price growth, of course, has already slowed down: for example, compared to last year, prices in June increased by 2.5%. However, prices are expected to start rising faster again in the fall, although not as much as in past years – growth is likely to remain around 4%. There are two main reasons behind this: rising energy prices and rising wages. Since electricity and fuel are used to produce and transport most goods, a chain reaction occurs – and the price of other goods rises as a result.
Secondly, we still have to deal with rising prices for services, which is directly related to rising wages. As average wages generally rise, there is a need to pay more for labor and people providing various services. On the other hand, an increase in their own wages gives consumers the opportunity to pay for services at a higher price. However, it is increasingly noticeable that consumers are trying to take advantage of any opportunities to save money, which in turn helps to curb price increases.
However, certain services are considered essential and people are forced to pay higher prices for them. An example is telecommunications services – everyone needs a telephone and the Internet, but in the last two years alone in Estonia they have risen in price by 16.3%. Or, for example, medical services, prices for which over the same period increased by 20.5%. Of course, to some extent, the rise in prices is also due to the greed of sellers – some, under the pretext of other reasons, raise prices even higher.
Why is everything so expensive here compared to the rest of Europe?
While traveling around Europe, many of us notice that goods and services in other countries are no more expensive, and sometimes even cheaper. In order to clearly see the difference in prices in different countries, an interesting tool was even created – the Big Mac index, which shows how much this hamburger costs in different parts of the world. In principle, this is a good indicator for understanding the general level of prices, but it cannot be considered an adequate reflection of the cost of living, since it only takes into account one very specific item – the price of one burger.
If you figure out why everything has become so expensive in Estonia compared to other European countries, there are several reasons for this. First, rising energy prices caused by the war in Ukraine have made local production more expensive, and cheap raw materials are no longer available from Russia. Secondly, it can be seen that the markup on goods has increased recently, and at the expense of it, companies are trying to recover from the rapid rise in costs and decline in profits in 2022.
For example, if back in 2022 the average markup on food products was 32%, now it is 41%. In fact, our food production cost increases have not been higher than those of food imported from other countries. Some types of raw materials for food production have also begun to become cheaper, but food prices in Estonia remain high.
Thirdly, our problem has always been that we are a small country. There is a pattern: the more you produce or sell, the cheaper one unit of goods costs – in economics this is called economies of scale. There are fewer people in Estonia and therefore fewer potential sales. For this reason, other costs per unit of goods, such as rent of retail space, salaries, etc., become higher than in other European countries.
In the average shopping center in Western Europe, there are more goods per square meter and less space, for example, for leisure activities. In our shopping center you can move around without crowds and find something to do for the whole day. If we add to this the fact that the turnover in Western Europe is much higher than ours, then it turns out that our seller’s costs per pair of shoes are higher.
For example, the average markup on clothing and shoes in Estonia is 84%, which covers these costs. On the other hand, this problem, of course, has always existed with us, and does not explain the recent price race. And finally, of course, the desire of sellers to earn more money also plays a role in rising prices, although our sales income indicators are not very different from similar indicators in other European countries.
Thus, we are in a situation where all the reasons causing the rise in prices coincided in time and significantly reduced the purchasing power of the population. Naturally, this has led to some consumers looking to save money by choosing cheaper products or ordering them online.
What needs to happen for the situation to change?
The best way to break out of the vicious circle of rising prices is to reduce or stabilize energy prices. On the other hand, a limiting factor for prices should also be the “threshold of tolerance” of consumers, upon reaching which people are simply no longer willing to pay more or choose, if possible, cheaper goods and services. However, it seems to me that we deserve the title of world champions in tolerating high prices. Compared to the rest of Europe, we are in a very sad situation: we are ranked 11th from the bottom in the ranking of average salaries, while our local prices are as high or even higher. That is, on our average salary we can afford significantly less than residents of other European countries – in terms of purchasing power we are in 5th place from the bottom.
You would think that people's lives would become easier if wages rose. However, too rapid growth in wages itself spurs price increases, as it increases consumer tolerance for higher prices. Thus, to break the vicious cycle of rising prices, several things must happen: lower electricity and oil prices, reaching a price tolerance threshold for more people, and no tax increases. However, we now see that the new government plans to raise several taxes (for example, VAT, income tax), and this, unfortunately, will lead to the fact that the restoration of purchasing power and the economy will be delayed even longer.
