Bank of Lithuania
2018-06-08
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Annual inflation peaked from 2.3% to 2.9% in May, mainly on account of global oil price increases, which entailed growth in petrol and diesel prices in Lithuania.

Comment by Paulius Morkūnas, Senior Economist, Macroeconomics and Forecasting Division, Bank of Lithuania

The increase in global oil prices was driven quite substantially by geopolitical factors. Since the beginning of the year, oil prices have soared around 10% on the back of a decline in oil extraction in Venezuela and the US decision to withdraw from the Iran nuclear deal, which heightens uncertainty over Iran’s oil supply in the global market. The situation in Venezuela and Iran is important for the oil market, since these countries together used to supply more than 5% of global oil. The prices of the ‘black gold’ are also being affected by the depreciation of the euro against the USD since mid-April and high global oil demand.  However, uncertainty in relation to the decision of the Organisation of the Petroleum Exporting Countries (OPEC) and other manufacturers regarding the amount of oil extraction suppresses oil price growth. Furthermore, when global oil prices reach a certain level, the US may increase shale oil production.

The dynamics of oil commodity prices also raises fuel prices in Lithuania. At the beginning of the year, diesel prices in Lithuania edged up by more than 4%; petrol prices rose somewhat less (about 3%) as well. While fuel prices are climbing, in Lithuania, they remain among the lowest in the EU though. Nevertheless, should this oil price dynamics trend persist, the manufacturers and service providers may revise their prices for goods and services on account of the rising production and transportation costs.

Food prices in Lithuania have been rising gradually and are approximately 3% higher year on year. Analysis of the most popular food product groups reveals the most pronounced increases in the prices of oils and fats (over 10%), fruit (about 7%). The prices of milk and dairy products, as well as eggs climbed about 6% over the year.  However, the growth in the prices of milk and dairy products moderated by some 5% this year, after having peaked in the autumn of last year. In the first months of 2018, we have been paying less for vegetables (despite some recent edge up in their prices due to seasonality factors) and sugar. The prices of the latter have been sliding down due to its huge global stocks.

Service prices have been rising about 4.5% this year on average. Early in the year, the pick-up in restaurant and café service prices was the strongest among the EU countries, while in terms of increasing hairdressing salons service prices, just a few EU countries surpassed Lithuania. The main reason behind that is strong growth in average wages and weaker growth in labour productivity. The latest data show that, in the first quarter of this year, average wages before tax climbed 9.5%, while the increase in labour productivity barely stood at 4%. This differential in the indicators (in the first quarter of this year – over 5%) contributes fairly much to rising service prices as well. The prices of passenger transportation services soared in addition, which could be driven not only be seasonality but rising oil prices as well. The existing economic situation shows that a deceleration in price growth within the services sector is not to be expected, at least in the near-term future.