Flash comment: Lithuania - September 8, 2015
Deflation deepened in August, but don’t tell that to households

In August consumer prices were 0.8% lower than a month ago and it was the third consecutive monthly price decline. The biggest impact on price fall was due to cheaper transportation costs – thanks to a fall in oil prices, of course. But cheaper food, clothing and shoes have also contributed to price deflation.

A stark dichotomy remains – goods are becoming ever cheaper, while prices of most services are rising. Prices of recreation and culture services were 1.8% higher than a year ago, while services of hotels and restaurants were 4.8% more expensive than a year ago. Prices of services are rising mainly due to increasing labor costs, but euro introduction and rounding up of prices may also have added a fraction of a percentage point.

Prices of goods in August were 2.7% lower than a year ago. Interestingly, some surveys show that 9 in 10 respondents think that most of the goods are more expensive now than they were before the euro introduction. There must be quite a few cognitive biases at play – representation, anchoring and, most importantly, confirmation bias. Yes, Some vegetables, fish, alcohol, tobacco and business lunch at your favorite café is more expensive than it was a year ago. But this small sample is too quickly extrapolated into “everything”.

Outlook: deflation will continue throughout this year

Average annual deflation will drop to 0.8% by the end of this year, but inflation is likely to return next year, and especially in 2017. Next year we forecast a wage growth to accelerate to 6.5%, which will further push up prices of many services. At the same time oil and food prices in commodity markets are likely to rebound somewhat, thus prices of goods will also start rising. We forecast average annual inflation of 2.5% and 3.0% in 2016 and 2017, respectively.

For more information about this report, please contact Mr.Nerijus Mačiulis, +372 5 258 2237, Nerijus.Maciulis@swedbank.lt

This letter is distributed by Swedbank in cooperation with Brightly. The letter is personal.