Estonia's on-year inflation rate again was over 3 percent in August, Statistics Estonia reported this week. With higher energy costs expected in heating season – from October to year-end and beyond, along with the implementation of new taxes, inflation is unlikely to ease any time soon and may even accelerate further.

According to Uusküla, the environment created by tax hikes and high inflation in Estonia makes it easy for businesses to hike prices. "With the VAT increase due next year, businesses know that prices will need to go up in any case, so they're not going to reduce them; instead, they'll keep them stable. This creates a situation where prices don't naturally adjust in the way they should," he said.

Mihkel Nestor, an analyst at SEB Pank, said that Estonians have grown accustomed to rising prices and, as a result, tend to be accepting of them.

However, Uusküla argued that people in Estonia should push back against price rises, as this could also help rein in inflation.

Uusküla said: "Estonians may not vote with their feet enough. There's little civic engagement, and there are few Facebook groups where people compare prices from different stores.

"Estonians don't have the confidence to state: 'I'll buy cheaper and fight for a lower price.' Likewise, haggling isn't a natural activity for Estonians. Encouraging more of that could help control inflation," he went on.

Addressing the issue that inflation is surely but steadily undermining the competitiveness of Estonian companies in foreign markets, Uusküla said is a difficult situation to overcome.

"It's a pretty complex situation— prices in Estonia have risen by 40 percent compared with pre-Covid times, whereas the eurozone average is 20 percent. Wages are catching up with price rises, and Estonian wages having risen 16 percent more than the eurozone average. This is clearly affecting our companies' ability to export, so you can see this a little in the fact that the industrial sector is struggling to gain momentum," Uusküla continued.

The impact of rising prices and wages is not limited to the industrial sector; services are also feeling the strain, he added.

"Our service exports have stagnated over the past few quarters—the significant growth we anticipated hasn't been materializing," Uusküla noted.

Devaluing the currency is not an option since Estonia uses the euro.

"We will likely start discussing how to reduce costs, and internal devaluation may be on the horizon. This has been used in Europe in areas where currency devaluation isn't an option: Lowering labor taxes, increasing profit taxes and VAT, which allows exporters to reduce costs while maintaining the state budget's overall position."

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