- The downward trend in the Baltic states price level continues: Lithuanian consumer prices decelerated to 3.0% y/y in July, down from 4.2% y/y in June. The same trend was observed in Latvia: CPI decelerated to 2.5% y/y in July, down from 3.4% y/y in June.
Details
Lithuania and Latvia Statistics have today published CPI inflation numbers for July. Inflation of 3.0% y/y in Lithuania was only moderately lower than our forecast and the consensus expectation. In Latvia, however, 2.5% y/y was a bit higher than most observers had expected.
As broadly expected, the declines in monthly CPI in Lithuania (0.8% m/m) and Latvia (0.6% m/m) can be explained mainly by the decline in energy and food prices. On the other hand, all three Baltic economies are in a deep recession that has driven down almost all consumer prices.
Assessment & Outlook
If implemented, the expected VAT increase in September in Lithuania would have a broad range upside effect on consumer prices; however, we believe that this impact will be partially compensated by the further cheapening of energy prices and reduction of the excise duty on diesel fuel. Overall, the assessments of price developments in Lithuania and Latvia for 2009 remain broadly unchanged: average inflation should stand at 4.5% and 3.6%, respectively.
Higher electricity prices in Lithuania from 2010 would push inflation up again. It should be pointed out that this energy shock would hit the Latvian economy as well, as Latvia is a net electricity importer – albeit to a much smaller extent. We believe that in the second half of next year, the upside effect will be mostly outweighed by the economic downturn which will continue in 2010. On the other hand, there are big uncertainties regarding the future electricity price in Lithuania. According to independent experts, the electricity price could rise by as much as two times in the coming three years.
