2018-04-10
This year price growth has been gradually slowing down: having reached, on average, 3.7% last year, annual price growth in March was 2.7%. This slowdown is generally driven by the consumer-favourable global commodity price developments, somewhat slower growth in service prices and the impact of last year’s substantial increase in excise duties on alcohol which has been waning since March. According to Bank of Lithuania projections, the price growth rate this year will be lower than last year, standing at 2.7%.
Paulius Morkūnas, Senior Economist at the Macroeconomics and Forecasting Division of the Bank of Lithuania
After last year’s surge in oil commodity prices, the price for oil and its products has been stabilising and is not likely to change significantly. However, in the beginning of the year fuel prices posted a larger-than-expected increase. It was influenced by rising prices for oil and its products in the global market. This increase has had a smaller impact on prices this year than it did, on average, in 2017 and is expected to weaken. The analysis of food commodity price trends reveals that milk and dairy product prices stand out the most. Having been growing since mid-2017, production of raw milk in Europe is increasing the supply of milk and dairy products. Due to this and large milk powder reserves in Europe, milk and dairy product prices have been rising at slower pace than last year. Other food commodity prices remain similar, except for the price of sugar which is somewhat lower due to large world reserves.
The impact of increased excise duties on alcohol has been losing its grip. Last year’s increase in excise duties on alcohol contributed 0.7 percentage points to headline inflation. This impact has been getting weaker, slowing down growth in overall prices of food, including alcohol and tobacco. When excluding the effect of indirect taxes, food prices in Lithuania have been rising at a slower pace than in Estonia or Latvia.
The service sector continues to give a substantial boost to price growth. With labour productivity increasing more slowly than wages, the price of services is accelerating as well. This is due to the fact that staff expenditure in this sector comprises a much larger share of all expenses than in the industrial sector. In addition, rising wages enable residents to consume more, which adds to the rise of inflation as well. While this year wages are projected to increase at a slower pace than last year, growth will remain robust mostly due to tensions in the labour market. However, prices of services are becoming more favourable to consumers due to moderating short-term price fluctuations, e.g. this year the growth of prices for passenger transport by air and accommodation have been rather subdued.
This year the growth rate of prices will still be outpaced by that of wages. Wages are projected to grow by 6.7% on average, while prices – 2.7%. A similar, just slightly more robust, wage and price increase trend was observed last year: wages increased by 8.5% on average, whereas prices – 3.7%. The issue of labour shortage is a considerable challenge, determining the rapid pace of wage growth as well as increasing disposable income of residents and, in turn, inflation. However, trends in global commodity markets are expected to remain rather favourable to consumers.