- As expected Lithuanian inflation picked up in September to 2.7%, from 2.6% y/y in
August. This was due to higher VAT and excise duties on tobacco products. While inflation in Latvia continues to decelerate: CPI decelerated to 0.5% y/y in September down from 1.8% y/y in August..
Details
Lithuania and Latvia Statistics have today published CPI inflation numbers for September. The hike in VAT and excise duties picked up Lithuanian CPI to 2.7% y/y in September. In Latvia CPI decelerated to 0.5% y/y from 1.8% y/y in August. We expected to see annual deflation as early as October.
Assessment & Outlook
As expected the VAT increase in September in Lithuania had a broad upside effect on consumer prices. However, we believe that this impact will be short lived. Our 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 are expected to push inflation up again. It looks like it would not be a one-time hike and probably extended throughout a longer period of time. Some independent experts expected the electricity price to rise by as much as two times in the coming three years. The Lithuanian government initiated some changes in the electricity price setting mechanism, which would somewhat diminish the negative impact of the expected energy price shock. Thus we revised downward our inflation forecast for 2010 to 0.9% on average. We do not expect a sustainable recovery of Latvian growth in 2010 and relatively poor domestic outlook in 2010 would determine even steeper price declines. Thus we expect CPI to decelerate to -0.9% in average. The risks to inflation projection are on the upside and mostly originate from the possible further rise in indirect taxes and global oil prices.
