Lithuania's annual inflation rate dropped to 2.5% in May as consumer prices increased by only 0.1%. Food prices rose the least at 0.9% while clothes and footwear prices fell 1.6%. Producer prices also declined for the second month in a row. Rapid declines in oil and commodity prices indicate inflation will be replaced by deflation over the summer months as consumer prices fall. However, a planned 22% increase to household gas prices from July will likely raise annual inflation by around 0.35 percentage points and could hamper Lithuania's plans to adopt the euro in 2014.

1. Flash comment: Lithuania
Economic commentary by Economic Research Department June 8, 2012
CPI increased by 0.1% in May, deflation is likely in summer
Contribution to annual CPI growth, pp As expected, inflationary tendencies ebbed in May as consumer
14 prices increased by only 0.1% and annual inflation dropped to
12 2.5%. The average consumer price inflation decreased by 0.2
10 percentage points to 3.9% and is likely to decrease during the
8 coming months.
6
4 Heating, footwear, clothes and tobacco contributed to monthly
2
inflation the most, while food products, especially dairy and
0
-2
vegetables had a negative contribution. Food products are currently
0.9% more expensive than a year ago, whereas clothes and
2007 2008 2009 2010 2011 2012
footwear are 1.6% cheaper.
Food Trans ports Housing
Others CPI growth
In May producer prices have been declining for the second month
Source: Statistics Lithuania, Sw edbank
in a row, indicating further downward pressure for consumer prices.
Consumer and producer prices Outlook
16% 4%
Rapid decline of prices of oil and most other goods and
12% 3%
8% 2% commodities indicate much weaker external pressure for Lithuanian
4% 1% consumer prices. We forecast that during summer months inflation
0% 0% will be replaced by deflation – consumer prices will decline.
-4% -1%
-8% -2% Unfortunately, “Lithuanian gas” has decided (and regulatory agency
-12% -3%
has approved) to increases gas prices to households by some 22%
-16% -4%
2009 2010 2011 2012
starting the 1st of July of 2012. Considering recent collapse in oil
Monthly inflation (rs) price this decision seems inadequate. Our calculations indicate that
Annual inflation (ls) this will bump up annual inflation by some 0.35 percentage points –
Producer prices to Lithuanian market, yoy (ls)
Source: Statistics Lithuania
possibly enough to hamper Lithuanian accession to euro zone in
2014.
Nerijus Mačiulis
Chief Economist
+ 370 5 258 2237
nerijus.maciulis@swedbank.lt
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