• In Lithuania, CPI inflation remained relatively stable in August, declining to only 1.8% y/y from 1.9% y/y in July.
  • In Latvia, despite our expectation of more pronounced acceleration in annual inflation (0.2% y/y), CPI accelerated only marginally to -0.3% y/y from -0.6 % y/y in July.

Details

Lithuania and Latvia Statistics have today published CPI inflation numbers for August. As broadly expected, the substantial impact on prices in the summer came from factors such as seasonal sales. In addition, the decline in global oil prices contributed to a more subdued inflationary outlook in both countries.

Assessment and outlook

Lithuanian prices – affected by one-off factors (such as seasonal sales) as well as fundamentals (slowly recovering domestic demand, fall in global oil prices) – declined by 0.3% m/m in August, while annual inflation decelerated to 1.8% from 1.9% in July. The biggest influence on inflation was lower prices for food products, clothing and footwear, as well as a decline in transportation. However, the influence of seasonal factors should decline soon and we expect to see a more intensive increase in food prices. Some Lithuanian food producers have already announced plans to raise prices because of higher agricultural prices which have increased due to bad weather conditions.

Prices also declined in Latvia in August and at a much faster rate than in Lithuania. CPI declined by 0.7% m/m. The weak domestic demand outlook is the main reason for the deflationary trend. However, in the coming months, inflationary trends should increase.

In general, we expect food price inflation to accelerate in the Baltic region over the coming months. We do not view a global ‘agflation’ scenario as very likely. However, the Baltic economies could be hit relatively hard, fuelling concerns about rising food price inflation – particularly at a time when the trend of recovery is still fragile.

Lithuanian inflation seems to be consistent in our model and we continue to believe that inflation could average 1.1% for 2010. However, there is some clear upside risk. For Latvia, we have revised upwards our CPI forecast and expect to see deflation average -1.1% for 2010.