I. Skačkauskaitė: Inflation in the Baltic States: More differences or similarities?

Comment by Ieva Skačkauskaitė, Economist, Macroeconomics and Forecasting Division, Bank of Lithuania

Stronger price growth in Lithuania is primarily related to domestic factors. For example, higher excise duties on alcohol have increased inflation in Lithuania by about 0.7 p.p. and VAT tax rate increase on heat energy – by approximately another 0.2 p.p. These factors have contributed with almost one fourth to the headline inflation.

On the other hand, the rise in food prices in Lithuania was much lesser than in Latvia and Estonia. In Lithuania, consumers paid for food and non-alcoholic beverages approximately 2 per cent more in July, while in Estonia and Latvia – about 6 per cent more on average than a year ago. Compared to our neighbours, in our country fish, oil and fat products went up less in prices.  Moreover, vegetable and fruit prices stood out, dropping in the second quarter in Lithuania, but rising in Latvia and Estonia. The prices for dairy products rose by an average 6 per cent in Lithuania, about 9 per cent in Estonia, and about 11 per cent in Latvia from last July.

Electricity, gas, central heating as well as other state-regulated prices decelerated inflation growth in all of the Baltic States for a long time; however, in the second quarter of this year, the price index of these services started going up. In Lithuania, these prices increased due to the raised VAT rate on heat energy in June and a far less pronounced decrease in gas prices than a year ago. According to the most recent proposals on the improvement of the taxation and social system of the Government of Lithuania, the VAT rate on heat energy is likely to decrease in autumn, and hence administered prices are likely to grow slower.

In Lithuania, compared to Latvia and Estonia, service prices have been rising faster. Particularly high contribution to the rise in service prices stems from wage dynamics. Since in Lithuania wages have been rising faster than in Latvia and Estonia, the overall growth in service prices is also higher. Nevertheless, in Lithuania, as compared to the other Baltic States, some service price components stand out: flight service prices soared significantly in the second quarter, whereas in Estonia and Latvia this service went down in price over the same period. The prices for restaurant and cafe services in Lithuania rose much faster than in the neighbouring countries. This is likely to be the indirect impact of increased excise duties on alcohol.

Next year inflation is likely to decrease. One contributing factor to such a decrease is a halt in the rise of global oil prices. In addition, there is no intention to raise excise duties as fast as this year, which will also curb inflation. And, finally, less pronounced wage increases are expected next year. Strong wage growth this year substantially contributed to the surge in service prices. Due to rising wages, some businesses are obligated to include these expenses into costs, and thus into the final prices of goods and services.

While forecasting food prices, it should be noted that numerous risks related to their further upward trajectory remain. The food price index of the Food and Agriculture Organization of the United Nations points to the rise in global market prices for dairy, meat and cereal products in recent months, except for sugar and vegetable oils. This will also affect consumer food prices in Lithuania. On the other hand, agricultural harvest is so far expected to be more abundant than last year, which is likely to restrain food prices from rapid growth.

Economic analysis and projections