Inflation slowing down is something new for families

In the Baltic States, people experienced a significant hike in prices in the 2000s, which also continued after the economic crisis at the end of the decade. SEB’s new Baltic Household Outlook reveals that, as of 2014, for the first time in their financial decisions, families in the Baltic States must account for a change in consumer prices that is close to zero or even negative.

Prior to the economic crisis, when the average inflation rate of the European Union was only 3.7 per cent, inflation in the Baltic States exceeded 10 per cent (10.6 in Estonia, 15.3 in Latvia and 11.1 in Lithuania). Following the economic crisis, prices continued to increase in the Baltics at a faster pace than the European Union average. In 2011 the average interest rate in Europe was 3.1 per cent, while at the same time it was 5.1, 4.2 and 4.1 per cent in Estonia, Latvia and Lithuania, respectively.

Since 2014, the situation has changed – prices increased less in the Baltic States than they did in the European Union on average (0.6 per cent) – 0.5 per cent in Estonia and 0.2 per cent in Lithuania. Unlike the rapid increase in prices, a low rate of inflation mainly benefits people with lower incomes.

Borrowers cannot count on the positive effect of inflation any more

The end of price growth has also had an effect on the situation of borrowers. As the inflation rate exceeded the interest rate for home loans in the 2000s, it meant that the families were actually paying no interest on their loans. Due to the rapid growth in consumer prices, both the actual amount of the loan obligation as well as the size of the loan payments were constantly decreasing. Taking into account the change in consumer prices, the purchasing power of EUR 100 borrowed at the end of the year 2000, for example, would at the end of 2014 only be EUR 55 in Latvia, EUR 58 in Estonia and EUR 68 in Lithuania, which means that a lot less is paid back than was actually borrowed. Rapid inflation made loaning an attractive option in the 2000s, as salaries and wages were growing along with the prices.

In 2015, borrowers cannot count on the actual size of their loan obligation decreasing, as when the prices are static or even decreasing, the whole sum borrowed needs to be paid back, meaning that the purchasing power of the money used for the loan payments is even bigger than at the time of taking the loan. “Low inflation should be making us more cautious about taking a loan. At the same time, as there is also less economic uncertainty, the currently low nominal interest rates are more attractive to potential borrowers than the high interest rates during the times of high inflation, even in the situation where, given the changes in the purchasing power of the money, real interest rates were negative,” commented SEB financial expert Triin Messimas.

High inflation increases the fiscal insecurity of families, affecting mainly those people whose income is lower, as the prices of staple goods are those which rise more than average. While the average increase of nominal salary and wages exceeded the inflation rate both before the crisis as well as soon after the crisis, the actual change in the salaries and wages was not distributed evenly between the different economic sectors and workers with different skills.


Additional information:

Triin Messimas, financial expert of SEB Estonia +372 66 55 167, triin.messimas@seb.ee
Evelin Allas, SEB Estonia Communications Manager +372 66 55 649, +372 51 11 718, evelin.allas@seb.ee