2017-04-10
Statistics Lithuania records an increase of 1.1 per cent in domestic prices in March month on month. While prices increased in March compared to February, a substantial part of the increase was related to seasonal and short-term factors. In March, clothing and footwear prices rose significantly due to new arrivals in shops; the prices of some food products and excise duty-affected alcoholic beverages also went up. However, annual inflation stood at 3.1 per cent in March, broadly unchanged from the previous month. Both the previous rebound in inflation and current inflationary trends were driven by the same factors – fuel and food prices. Fuel and food prices rose in particular at the beginning of 2017 and their contribution to annual inflation growth was the largest. Fuel prices were directly affected by global oil price increases, while the trends in the prices of global food commodities contributed to the development of food prices.
Comment by Ieva Skačkauskaitė, Economist, Macroeconomics and Forecasting Division, Bank of Lithuania
Regarding food products, it is also important to analyse internal market dynamics. According to Statistics Lithuania, the farm-gate prices of agricultural products are currently more than 15 per cent higher than a year ago. Milk commodity prices rose by more than 30 per cent over the year. However, following seven months of growth, average milk farm-gate prices in Lithuania went down in February of this year and, according to experts, may continue declining. This partly explains why statisticians record weaker annual growth in food prices.
Looking ahead, the Food and Agriculture Organisation of the United Nations projects only a marginal year-on-year growth in food commodity prices in 2017. Moreover, it is expected that, this year, the agricultural harvest will be better than in 2016. Hence, both the internal and external risks of substantial food price increases are not very high.
On the other hand, not only food prices, but also the prices of services have increased substantially. As in 2016, this year the prices of services are rising in line with robust wage growth. As of 2013, wages in our country grew by an average 6 per cent per year, while in the last quarter of 2016, wages grew by as much as 8.7 per cent quarter on quarter. For the wage-intensive services sector, such labour market dynamics are direct pressure to price increases.
In addition, while electricity, gas and heating are still cheaper than a year ago, this trend is likely to be reversed, indirectly influenced by higher oil prices. It should be noted that the projected value added tax (VAT) relief on central heating may contribute to this as well. Hence, the current economic environment suggests that annual headline inflation is not likely to decrease in the near future.