Development in purchasing power with various changes in earnings and price levels in 2022,%
The purchasing power of Finns' wages may decline faster this year than ever before in the 21st century, the Taxpayers Association of Finland predicts in its recent Tax Review.
Taxation of many Finnish wage earners will be slightly reduced this year, but the rate of inflation raises many questions. The Ministry of Finance's forecast for this year's inflation is about 4 %, but according to various estimates, the rise in the prices of many consumer products (including foodstuffs) is yet to come. As a result, inflation may be significantly higher. The Ministry of Finance forecasts an alternative calculation of the impact of expansion of sanctions imposed on Russia, whereby the price level would rise by 6.2 % this year.
The Taxpayers Association has calculated by what percentage the purchasing power of an employee will decrease at different inflation levels. It ranges from 0.8 percent up to 3.8 percent. The calculations have been made with a monthly income of € 3 600, but the dynamic is similar to the salary categories between € 2,447 and € 9,789 per month. Thus, in the worst-case scenario, the purchasing power of a middle-income employee would weaken by 3.8%. This would mean that approximately € 1,200 less would be available for the purchase of goods this year than last year, says Mikael Kirkko-Jaakkola, Chief Taxpayers Association economist.
A horror scenario of 3.8% may be ahead in case of inflation rises to 6.2% and wages rise by just 1.6%. If inflation is assumed to be 4% according to the forecast made by the Ministry of Finance and the income of a middle-income earner increases by a projected 2.6%, the purchasing power of net wages will decrease by just over 1%. This level would mean almost € 350 a year in money.
Mikael Kirkko-Jaakkola points out that inflation of 4% would mean a fall in the price level from the current situation. In March, inflation was 5.8% year-on-year. If the price level remained on average at the March level for the rest of the year, full-year inflation would be 4.6%.
Kirkko-Jaakkola considers that an increase in salary by 2% is a quite typical situation. The purchasing power of a wage increase of this magnitude would decrease by 2.1 % with inflation of 4.6 %. In euros, this would mean around € 650 a year.
According to the Taxpayers Associations' forecast, purchasing power would fall by 0.8 % at the lowest. This would mean around € 250 a year for the average income. This will require the inflation to remain within 4% and wages to rise by 3%.
How drastically decreasing purchasing power depends a lot on world events. Forecasting is unusually difficult this year.
The full information and the source text can be found at Taxpayers Association of Finland, Veronmaksajat and Helsinginuutiset website.
Published 04.05.2022, FINREPO