Paulius Morkūnas: Inflation in Lithuania is expected to slightly moderate and stay below levels in Latvia and Estonia
While food price developments have been rather favourable for consumers and the turmoil in the oil commodity market has settled, the inflation rate is expected to be slightly lower than a year ago as some of inflation drivers are likely to be replaced by others.
Paulius Morkūnas, Senior Economist, Macroeconomics and Forecasting Division
Last year food prices rose more slowly, yet fuel prices rocketed. Growth in food prices decelerated given the good harvest of certain fruit and the contribution of some external factors, such as large stocks of oils and certain dairy products as well as their sustainable global supply. However, partly due to unfavourable weather conditions in the summer months, the vegetable harvest was poorer, therefore vegetable prices rose significantly towards the end of the year. On the other hand, the surge in fuel prices had a more considerable impact on consumers. In 2018 tensions between the United States and Iran increased uncertainty over oil supply, fuelling volatility in global oil commodity prices. According to Eurostat and Bank of Lithuania calculations, such price fluctuations have been widespread – on average, fuel prices in Latvia and Estonia have increased more than in Lithuania. With global oil supply outpacing demand, global oil commodity prices have decreased and, in turn, fuel prices have become more appealing for consumers.
Labour market tightening continues. Amid labour shortages, the average wage is still growing considerably faster than prices. This, however, is only one side of the coin. Wages are rising much faster than labour productivity, which translates into increasing labour costs. The latter trigger higher prices for services, which have contributed to approximately one third of headline inflation in Lithuania for the second consecutive year. Although this situation is not particularly sustainable in terms of business competitiveness, similar trends are expected to prevail throughout 2019: albeit at a slower pace than last year, wages are projected to continue on an upward climb, rising by roughly 7%. In addition, growth in average net wages should be further accelerated by changes related to the tax-exempt amount of income. Similarly to last year, Lithuania is expected to surpass both Estonia (6.2%) and Latvia (6.5%) in terms of wage growth.
On a year-on-year basis, inflation is anticipated to somewhat decrease in 2019, primarily reflecting developments in oil commodity prices. Global oil commodity prices are expected to be somewhat lower than last year. However, they are dependent on geopolitical factors which are difficult to predict. It should also be noted that as a result of the decline in fuel prices part of household and corporate savings will be used to cover the increased electricity and gas prices. Lower value added-tax rates for firewood, timber products and press are not expected to have a significant impact on inflation as they are likely be offset by higher excise duties on ethyl alcohol, tobacco and its products. According to Bank of Lithuania projections, price growth in 2019 is projected to follow a similar path as last year and reach 2.4%, which is 0.5 percentage point lower than in Estonia and Latvia.