Economist: Removing tax hump expected to add less than 0.5% to inflation
The fairly rapid price increase in the second half of last year was largely driven by tax hikes, but this year inflation should be slower, said Kaspar Oja, economist at the Bank of Estonia.
Data from Statistics Estonia released on Wednesday shows prices rose 4.1 percent in December on year.
The Bank of Estonia's forecast suggests inflation in 2026 may stay below 3 percent. Taxes are expected to have less of an impact, Oja told ERR.
"Starting in January, the effect of the car tax, which was over 1 percent, should fade out, and by mid-year, the effect of the VAT hike, which is around 0.7 percent, will also fade. So in summary, in 2025, the effect of taxes was around 2 percent, a bit more, and this year it will be around 1 percent, taking into account all excise tax increases as well," he said.
The economist said last year's inflation was also significantly affected by rising healthcare prices. He said this impact will also fade out this spring.
"In other words, the fairly rapid price increase we saw in the second half of 2025 came largely from the impact of tax hikes," Oja noted. "Since that impact will be significantly smaller in 2026, inflation will also be slower."
Removing the minimum taxable income threshold, known as the tax hump, will likely increase demand, which will have some effect on inflation. Typically, this effect on inflation is larger when the economy is in a "heating phase", such as in 2021 during the pension reform.
"At that time, companies assessed the economy to be in very good shape. That cannot be said now, and probably for that reason, the impact of additional money entering the economy on inflation will be smaller," Oja explained.
Estonia's already high prices may restrain inflation, he added. Being able to buy goods abroad when traveling or online can also help moderate prices.
"That likely leads to more frequent price comparisons and stronger competition. Raising prices in Estonia becomes more difficult," the economist said.
Oja believes the effect of eliminating the tax hump on price growth will be below 0.5 percent per year. However, the economic stimulus effect will emerge gradually over the course of the year and to some extent also at the beginning of next year.
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Editor: Karin Koppel, Helen Wright
