Lithuanian consumer prices went down in July

Aug 17, 2000
Rokas M. Tracevskis

Consumer prices decreased by 0.4 percent in July compared to June, when consumer prices rose by 0.7 percent on the previous month. Buyers are happy about these changes, but economists and businessmen are not thrilled about July's deflation.

According to Lithuania's statistics office, foodstuffs and non-alcoholic drink prices dropped 0.4 percent, while prices of clothes and footwear dropped 0.8 percent. Transportation costs declined 1 percent, influenced by a 2.7 percent decline in petrol prices and a 1.3 percent decrease in diesel fuel prices.

Purchasers of alcohol and cigarettes are also happy. Alcoholic beverages and tobacco prices fell by 0.3 percent.

The cost of health care, housing, water, electricity, gas and other fuel prices edged down also, as did costs of recreation and cultural activities.

By comparison, a 0.5 percent drop in consumer prices was registered in Latvia, while in Estonia prices jumped up and monthly inflation of 0.9 was registered, according to information from the statistics department.

There are several reasons for July's deflation in Lithuania, said Vitalija Klokova, an economist with the statistics department.

"One reason is this: Food products always become cheaper in the summertime. Another reason is the collapse and closure of the Russian market for Lithuanian exports, the result of which is that the overproduction of consumer goods, and first of all food, stays in Lithuania," she said.

After the Russian crisis, Lithuania started to export more goods to the West than to the East, but Western markets still cannot compensate for the loss of the huge Russian market, Klokova said.

There is one more source of deflation, according to economist Gediminas Cerniauskas. Lithuania is the only country in Central Europe where the national currency, the litas, is tied to the U.S. dollar by state law. The litas is pegged to the dollar at 4 to 1.

The euro has fallen against the dollar and consumer goods imported from Western Europe to Lithuania become cheaper as a result, said Cerniauskas. At the same time, Lithu-anian consumer goods exported to the euro zone became more expensive and less competitive because of their price.

"I agree that it is one of the factors causing a drop in prices of consumer goods in Lithuania. Consumers, of course, enjoy such a situation. However, deflation is not good for the economy. It means that the amount of money for investments is declining and there is stagnation," Klokova said.

She said small inflation is healthy for the country's economy, and if the litas were tied to the euro and not to the dollar, Lithuanian inflation in July would be closer to that of Estonia.

Last year, the Lithu-anian government and Reinoldijus Sarkinas, chairman of the Bank of Lithuania, said the fixed rate for the litas against the dollar is expected to remain valid until the middle of 2001 when the currency will be tied partly to the euro. This change will be a logical step, because the European Union becomes the major trading partner for Lithuania and membership in EU itself is a strategic goal of the country, said central bank representatives.

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