2017-01-10
Inflation indicators published in December by Statistics Lithuania reveal a somewhat larger monthly change in prices – 0.5 per cent. This rise in prices should not come as a surprise: in December, soaring global oil prices contributed to the increase in fuel prices, while the recent rise in world food commodity prices boosted vegetable, dairy and meat prices in the internal market. In December, compared to November, the prices for these food products were by 7.6, 3.6 and 0.8 per cent higher respectively. Nevertheless, there are two major reasons that hinder expectations of a long-term rise in prices. Firstly, food prices tend to fluctuate frequently. These prices are affected by factors such as weather conditions, changes in consumer demand, driven by income developments, and many other factors. Secondly, the fact that the price of oil has increased should influence transportation expenses and fertilizer prices and this, in turn, contributes to higher prices of final goods; nevertheless, the latest projections for oil prices do not suggest any significant rise in oil prices in the medium term.
Comment by Ieva Skačkauskaitė, Economist, Macroeconomics and Forecasting Division, Bank of Lithuania
While in November 2016 OPEC countries reached an agreement to limit oil production, there are several important factors that might impede the arrangement. Firstly, Iran has been exempted from an oil output cut due to the particularly poor economic situation in this country. Secondly, due to security challenges in the region and political pressure, exemptions have been also applied to Iraq. Thirdly, Russia, a non-member of the OPEC cartel, agreed to unprecedented cuts to its own output. However, it will be quite challenging for OPEC members to control and monitor if both the members and Russia are following their obligations. Finally, as global oil prices rise, US shale gas producers should increase production, thereby hindering oil price increases.
Annual inflation increased in December, to 2.0 per cent, mainly due to a stronger rise in fuel and food prices together with the significantly increased costs of services. Service prices have been rising steadily due to both growing domestic demand and wage growth in the labour intensive sectors. Nevertheless, the measure of underlying inflation, which excludes oil and food price developments due to their high volatility, does not show any significant acceleration in price growth: in the last months of 2016, underlying inflation was somewhat stable. Average annual inflation was 0.7 per cent in 2016. This year, it is likely to increase due to the projected stronger growth in global oil and food commodity prices: according to the latest projections of the Bank of Lithuania, average annual inflation will be 1.9 per cent in 2017.
Very similar dynamics of annual inflation are observed in the neighbouring countries. In Latvia and Estonia, food and fuel prices also rose substantially. However, in Estonia, the rise in the prices of services has decelerated. According to the central bank of Estonia, the deceleration in the growth of service prices is caused by lower inflation expectations of Estonian households and the resulting higher propensity to save. This causes downward demand-side pressure on prices. According to the preliminary estimate, annual inflation in the euro area increased in December to 1.1 per cent. Inflation components reveal that the recent rise in energy and food prices contributed the most to higher headline inflation as in the case of Lithuania.