Price Pressures Ease, Boosting Lithuanian Consumer Confidence
The easing of inflation-a-paper-tiger/” title=”Inflation? "A paper tiger"”>price pressures and occasional monthly deflation this year create a favorable environment for the recovery of household consumption in Lithuania. Deflationary inflation and sustained rapid wage growth have already restored purchasing power to pre-2022 levels, despite the initial inflationary shock. This has instilled confidence among consumers, who are now more likely to meet their expectations. This renewed confidence has led to increased consumption appetite among Lithuanian households, which will ultimately stimulate activities that rely on domestic demand.
The monthly deflation in July was primarily due to the seasonal nature of the month. July is traditionally a period of sales in the clothing and footwear industry. Retailers often offer generous discounts to clear out summer merchandise and make way for new autumn-winter collections. This discounting led to a 7.2% decrease in prices for clothes and footwear in July compared to the previous month. Additionally, the month of July coincides with the peak harvest season for fruits, berries, and vegetables, leading to lower prices for food products and non-alcoholic beverages.
However, these consumer-friendly factors were partially offset by more expensive transport goods and services, increased prices for recreation and culture, and hotel, cafe, and restaurant services.
While these inflationary pressures are likely to persist in the coming year, they are expected to be primarily driven by service inflation. This type of inflation is highly sensitive to wage growth, as labor costs represent a significant portion of service pricing. Lithuania’s wage growth is fueled by government salary increases, workforce imbalances, and a chronic shortage of skilled professionals.
The minimum wage is also set to increase significantly again next year, which will have a direct impact on wages across the entire labor market. This will likely lead to further upward pressure on wages and prices in sectors that rely on low-skilled labor.
Despite these potential inflationary pressures, the outlook for consumer prices remains favorable. International commodity prices for food and energy are at their lowest levels since 2021, providing some relief for consumers. However, ongoing tensions in the Middle East and potential disruptions to oil supply could potentially impact oil prices in the future.