Why do food prices seem to be rising faster than income?
More than a third of Lithuanians are concerned about rising food prices. Surveys show that such worries have been lingering for more than five years. In retrospect, however, pensions have grown at almost double the rate compared to food prices over the last decade, while the average net wage has increased more than twofold. So why are people still hung-up on price increases?
Comment by Paulius Morkūnas, Senior Economist at the Macroeconomics and Forecasting Division of the Bank of Lithuania.
Low-income earners are more sensitive to price fluctuations. The absolute majority (over 90%) of residents believe that prices in Lithuania are rising, yet the impact of such increases seems to vary: those earning the least are more affected by price changes than residents receiving higher income. Data suggests that low-income earners spend the main bulk of their income on basic necessities, thus it is only natural that even the slightest price change may squeeze their budget. For instance, low-income households have allocated nearly two‑thirds of their total expenditure on food and housing (e.g. electricity, gas, heating), compared to at least half of total expenditure allocated by middle-income earners.
Pessimistic sentiment is also driven by painful past experiences. In 2006-2008, the average retirement pension rose by more than one and a half times, as did wages. However, with the onset of the financial crisis, income growth was restrained for roughly five years to come. In 2009-2015, the rise in the average pension moderated, while the average wage was growing apace with average food prices. Some residents, therefore, may have seen a steeper purchasing power decline. It is likely that the negative past experience is embedded in public memory, thus people tend to be more aware of rising prices than growing income. Nonetheless, the economic situation observed in recent years gives no grounds for pessimistic anticipation: both the average pension and the average wage have been rising at a fourfold rate compared to food prices.
For more information on prices and inflation in Lithuania, see the Lithuanian Economic Review which will be published on 27 March.