Compared with July of last year, goods were 3.9 percent more expensive and services 7.7 percent more expensive.

Lauri Veski, lead analyst of consumer price statistics at Statistics Estonia, said the last time the annual change in the index was this high was in July 2023, when it stood at 6.4 percent.

The biggest contributor to the annual increase was food, which rose in price by 9.1 percent compared with July 2024.

"The 10.5 percent annual rise in healthcare prices stems mainly from the updated pricing list for health services introduced in April," Veski noted.

Over the year, clothing and footwear became 0.9 percent cheaper and housing-related costs fell by 1.8 percent.

"Compared with June this year, housing prices rose by 1 percent, including a 2.1 percent increase in rent. Transport also had a significant impact on the monthly comparison, with prices up 1.5 percent. In July, gasoline prices rose by 1.3 percent and diesel by 4.5 percent, though both remain lower than a year ago. Clothing and footwear prices dropped by 4.2 percent over the month," the analyst explained.

Food prices rose 0.5 percent in July compared with June. The main drivers of the increase were meat and meat products, milk, dairy products and eggs — all up by 2.1 percent. Offsetting this were price decreases for vegetables (down 2.9 percent) and fish and fish products (down 3.6 percent).

Statistics Estonia will release data for the August consumer price index on September 5, accompanied by a press conference. In addition to the latest figures, the agency will present an analysis of a price level adjustment to the electricity price index and a new model for calculating electricity prices. The model will demonstrate how the CPI and inflation were overestimated between 2021 and 2025 and will show what the CPI would be now if the adjustment had already been made. The finalized model will be implemented at the start of 2026.

Expert: VAT hike the biggest contributor

Lenno Uusküla, chief economist at Luminor Estonia, said the biggest factor driving prices over the past month was the increase in the value-added tax (VAT). "This led to a 1.5 percent rise in transport costs, a 1.4 percent rise in communications, a 1.4 percent rise in prices at restaurants and cafés and a 1 percent increase in housing costs," he said.

"The reason July's price growth was significantly lower than the VAT hike itself is that not all sectors raise prices immediately in response to the VAT increase. Price adjustments tend to happen gradually," Uusküla explained.

He added that prices for several goods and services also declined in July due to one-off factors. For example, accommodation prices dropped by 8.8 percent and prices for data storage media fell by 25.3 percent.

Stronger euro makes goods and energy cheaper

"In the first half of this year, the euro appreciated against the U.S. dollar, making imported goods and energy from the global market cheaper for us. As a result, the price of oil in euros has dropped by nearly 15 percent, even though the dollar price of oil has remained around $70 per barrel," Uusküla said.

He noted that further price increases are expected this year, as the effects of the VAT hike will continue to show in the coming months.

"On the other hand, global oil prices remain low, and the European Union is not currently planning any retaliatory tariffs on U.S. goods, which helps prevent price increases for imported products. Food prices on the global market have also remained stable since April. In Estonia, wage growth is slowing down, which reduces pressure on service prices. Overall, annual inflation is expected to remain around 5 percent," Uusküla added.

In contrast, inflation across the eurozone has been about 2 percent.

"Given that our price level is now very close to the eurozone average, inflation above the eurozone rate is the most serious issue facing our economy — second only to the absence of economic growth. Rising prices eat away at wage increases, which companies continue to offer despite difficult economic conditions, erode the purchasing power of savings and weaken international price competitiveness. Inflation isn't just a standalone problem — it's one of the key factors holding back economic growth now and in the coming years," he said.

Bank of Estonia: VAT hike to translate into prices in full in the coming months

According to Statistics Estonia, the consumer basket rose by 0.6 percent in July compared with the previous month, which may suggest that the 2-percentage-point VAT increase was only partially passed on to retail prices, writes Sulev Pert, economist at the Bank of Estonia.

"Food prices grew relatively moderately in July — up 0.5 percent from June. Some of the VAT increase may have already been reflected in food prices earlier, as Estonia has had one of the fastest inflation rates in the euro area in recent months. At the same time, some prices may rise with a delay, meaning we'll likely see the full effect of the VAT hike in the coming months," Pert said.

Prices for alcohol and tobacco rose by 3.6 percent over the month, as both VAT and excise duties increased, he noted.

"Prices for consumer goods, including clothing and footwear, rose somewhat less than might have been expected based on the VAT hike alone. Due to falling wholesale prices, retailers likely found room to reduce prices and absorbed part of the tax increase themselves. Clothing and footwear prices typically fall by around 5 percent in July due to seasonal discounts, and this year the drop was 4.2 percent. However, the VAT increase was passed on immediately and fully to the prices of more expensive durable goods — such as cars, jewelry and floor coverings — as expected," Pert wrote.

The VAT-driven price rise was more pronounced in the services sector, where competition is weaker. "The cost of utilities and communications rose in line with the tax increase. Due to seasonality, price growth in services could have been even faster, but since accommodation and holiday travel prices had already spiked at the start of summer, July saw a somewhat more subdued rise in leisure service prices," said Pert.

He emphasized that not all prices were affected by the VAT increase. "For example, rent, healthcare services, social care, insurance and airline tickets are exempt from VAT. In total, VAT-exempt goods and services make up a fairly large share of the consumer basket — more than one-tenth," he said.

According to the Bank of Estonia's forecast, the consumer basket is expected to rise by 5.4 percent this year. Pert added that electricity prices — an important but difficult-to-predict factor — have significantly curbed overall inflation so far this year.

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