Finnish is a language with simple syllable structure but rich morphology. It was investigated whether syllables or morphemes are preferred processing units in early reading. To this end, Finnish first- and second-grade children read sentences with embedded inflected target words while their eye-movements were registered. The target words were either in essive or inessive/adessive (i.e., locative) case. The target words were either non-hyphenated, or had syllable-congruent or syllable-incongruent hyphenation. For the locatives, the syllable-incongruent hyphenation coincided with the morpheme boundary, but this was not the case for the essives. It was shown that the second-graders were slowed down by hyphenation to a larger extent than first-graders. However, there was no slowdown in gaze duration for either age group when the syllable-incongruent hyphen was morpheme-congruent. These findings suggest that Finnish readers already utilize morpheme-level information during the first grade.