Bank of Lithuania
2018-01-09
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After last year’s swing, this year inflation is likely to subside because the impact of the drivers that raised prices in 2017 will no longer be that significant. Last year, acceleration in price growth, with its average annual rate of 3.7 per cent, was driven by both domestic economic factors and consumer-unfriendly trends in global commodity markets. The major contribution to inflation growth over the year stemmed from the prices of food and beverages (of which – beer, milk, oils and fats), fuel and services.

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

A leap in global market prices

As it is known, growth in food and energy prices was mainly driven by external factors to which Lithuania, as a small economy, cannot contribute in any way. Last year oil prices leapt more than 20 per cent, contributing to a rise in fuel prices in Lithuania. Global food commodity prices, which leapt about 12 per cent last year, was another strong driver of inflation. Among often consumed food products, raw milk, oil and fat prices recorded the highest increases. The price for butter climbed an average 20 per cent, that of oils and other fats – around 12 per cent over the year. Since the prices for these food commodities climbed on a global scale, Lithuania was no exception either. The prices for milk, butter, oils and fats rose to similar levels not only in Lithuania but Estonia and Latvia as well.

Tax changes boosted inflation

Nevertheless, inflation growth in Lithuania and Estonia outpaced that in Latvia. A substantial increase in alcohol prices in the two countries was one of the reasons for that. Excise duties were raised significantly in both Lithuania and Estonia. As a result, beer prices alone picked up by some 30 per cent in Lithuania and some 12 per cent in Estonia over the year.

Tax changes such as excise duties on alcohol, changes in the VAT allowance for heating contributed significantly to inflation in Lithuania last year. If we analysed inflation excluding the above-named tax changes, we would see that, in Lithuania, price growth is very much similar to that in Central and Eastern European countries, where it fluctuates around 3 per cent. This shows that all of them still are developing economies with similar convergence processes still going on, i.e. they are approaching EU averages.

What boosted growth in service prices?

Service prices in Lithuania have been on the rise to the largest extent among all of the euro area countries. Strong growth in service prices in Lithuania should be related to wage dynamics. While wages in all of the Baltic States rose above the euro area average, the strongest rise was recorded in Lithuania. Since wages within the services sector mostly account for the biggest share of total cost, businesses are able to include wage increases into the final consumer price. With regard to services, restaurant and café as well as house maintenance and repair services posted the strongest growth in Lithuania over the year.

What will 2018 bring?

This year, inflation rates will be lower due to the waning effects of the contributions to increased inflation last year. E.g. it is not intended to raise excise duties on alcohol, while those on tobacco will increase to a lesser extent than they did last year. Moreover, global oil and food commodity prices are projected to climb much less this year and thus growth in such prices for consumers is likely to weaken. Finally, although wages are likely to keep rising in the future, it should not be assumed that this year they will rise as much as they did last year. Owing to a lack of staff, wages in Lithuania have for some time been rising much faster than labour productivity. This situation is not sustainable as businesses must maintain their competitiveness. In view of all these circumstances, the Bank of Lithuania projects that the rate of growth in prices this year will be lower than last year and reach 2.6 per cent.