According to Statistics Estonia, the consumer basket went up in price by 0.6% in July, which may indicate that the 2% increase in the VAT rate was only partially passed into retail prices. Year-on-year, the price level rose by 5.4% in July: service prices increased by 12%, consumer goods by 2.5%, and food products by 9.1%. However, energy prices decreased by 7%.

The rise in food prices was relative flat in July compared to June - prices grew by just 0.5%. With annual inflation in Estonia being among the highest in the EU countries in recent months, it cannot be ruled out that part of the VAT increase was passed through to the retail prices of food even earlier. However, some prices may go up with a longer time lag, which is why we will only see the full effect of the VAT increase in the coming months. The prices for alcohol and tobacco rose by 3.6% in a month, because in addition to the VAT increase, excise duties also went up.         

The prices of consumer goods, clothing, and footwear rose in July somewhat less than might have been expected in the light of the increase in VAT. Due to the decline in cost prices, retailers likely found opportunities to reduce prices and absorbed part of the tax rate increase. Clothing and footwear prices usually decrease by around 5% due to discounts in July, but this year the price drop reached 4.2%. The increase in VAT was immediately and fully reflected in the prices of more expensive durables (cars, jewellery products, flooring), as was to be expected.

The price increase driven by tax changes was more noticeable in the services sector in July, due to weaker competition. Both utilities and communication services went up in price as a result of the tax. While seasonality could have led to even quicker price hike in the services sector, the prices of accommodation and holiday travel had already increased sharply at the start of summer, resulting in a slightly more modest growth in July.  

However, the VAT increase did not affect all prices. For instance, rent, medical services, social care, insurance, and flight tickets are all VAT-exempt. Altogether, these VAT-exempt goods and services account for a fairly large portion of the consumer basket—more than a tenth.

According to Eesti Pank’s forecast, the consumer basket will increase in price by 5.4% this year. A very important, yet difficult to predict, factor will be the price of electricity, which has strongly held back general price growth this year.