Madis Müller: Why is inflation so high and so different in different euro area countries? Speech by Mr Madis Müller, Governor of the Bank of Estonia (Eesti Pank), at the Bank of Slovenia, Ljubljana, 3 March 2023. *** Thank you for inviting me. I am very pleased to be back in Slovenia. Bostjan and his colleagues from Banka Slovenije are such excellent hosts that it is always pleasure to visit your central bank. Today my plan is to take stock of where we stand in our fight against our common enemy, high inflation. I will first talk briefly about the causes of the surge in inflation, both globally and in Europe, where we should note that current inflation rates differ widely across the member states of the euro area. Since I am in the unenviable position of representing a country that had one the highest inflation rates in the euro area last year, I will also explain the drivers behind the particularly fast growth in consumer prices in Estonia. I will then discuss how high inflation impacts consumers and the public finances, how monetary policy has responded, and how monetary, fiscal and structural policies interact. I will conclude by explaining why the best contribution that we as central bankers can make to the economy is to restore price stability. This requires us to maintain our course of monetary tightening until we are confident that inflation will be brought back to its target in a lasting and sustainable manner.
Much of the following also applies to Latvia and Lithuania as the other two Baltic countries. To start with, the share of energy and food in the consumer basket is still somewhat higher in our countries than the average in the euro area. This meant that rapid rises in the prices of energy and food in particular consequently had a bigger impact on our inflation readings. Compounding this, price setting has traditionally been more flexible in the Baltic region than in other euro area countries, meaning that both rises and falls in commodity prices are translated more swiftly to consumer prices. Administered prices are also flexible and governments have allowed higher global energy prices to pass through quickly to regulated prices, while governments in some other euro area countries have been more cautious. High energy prices have also passed through to consumer prices in Estonia particularly fast because Estonian households have generally preferred to have flexible prices in their utility contracts. This had been a smart choice in most previous years, but it cost us dearly in 2022. It meant that any price increases in the wholesale markets for electricity in particular were immediately reflected in the prices paid by households. The increases in the prices of electricity that Estonian households experienced in the first half of last year were indeed dramatic.