Inflation just keeps on going up

  • 2008-07-16
  • Staff and wire reports
RIGA - Inflation continues its surge across the Baltics as the latest figures for Lithuania and Estonia climbed further into double-digit territory. Consumer inflation for June in Lithuania hit 12.7 percent, while prices in Estonia were 11.4 percent higher than 2007, up from May figures of 12 percent and 11.3 percent respectively.
Analysts in Lithuania warn that governments are doing little to curb the incessant price increases. According to Jurgita Jurgutyte, an analyst with Hansabankas, the rise in prices of crude oil and other commodities, including food, throughout the world added some 7 percent to the current rate of inflation in Lithuania.

Despite what might appear to be a slowing in the upward swing, she adds that "The monthly slowdown in the growth of prices in June is a temporary phenomenon resulting mostly on seasonal factors, such as a decline in the prices of some foodstuffs. However, the prices of centrally supplied heating will increase in the majority of municipalities in the nearest time, pushing up the growth of prices again."

The inflation indexes in June were no surprise, says Rimantas Rudzkis, chief analyst at DnB Nord bank, as the main drivers of inflation remained unchanged, namely the rising prices of crude and food. In Rudzkis' opinion, the growth in prices might be abated somewhat by the encouragement of competition in the retail market.
Compared to June 2007, prices in Estonia of goods rose last month by 10.9 percent as food prices were up 15.8 percent and those of manufactured goods by 7.0 percent. Services increased by 12.5 percent, as regulated prices of goods and services, such as electricity rates, surged by 22 percent and non-regulated prices by 8.5 percent.

The biggest impact on household expenditures came from the rise in the price of heating. The increase in the price of motor fuel accounted for three-fourths of the 14.7 percent rise in the price of transport services.
The latest hike of key interest rates by the European Central Bank (ECB) may have only limited effects on the growth of inflation in the European Union (EU), and Lithuania in particular, believes Gitanas Nauseda, adviser to the president of SEB Bank, Lithuania's largest commercial bank.

"First of all, this was a decision addressing the so-called inflation expectations. However, it is obvious that the raising of interest rates will hardly change one of the key sources of inflation - global crude prices - oil will not get cheaper because of this. Yet the prime aim of the move was to declare once more the main objective of the European Central Bank - price stability - and sacrifice all other objectives for the sake of low inflation," he said.
Nauseda believes that the ECB decision to hike the key interest rate by 25 points, to 4.25 percent, will not have any pronounced effect on the interest rates on retail loans. "A 25 basis point increase is not too significant a change to make major changes to the general situation."

Last Thursday the ECB hiked the key interest rates in an attempt to tame euro zone inflation, which hit 4 percent in June, double the ECB's upper limit of 2 percent.
Considering current trends in the global economy, it is still too early to hope that the Latvian economy is already past its worst phase, cautions GE Money Bank analyst Janis Cirulis.
Last week annual inflation figures for June were released showing Latvia running at 17.7 percent, slightly off the previous month's 17.9 percent.

Cirulis noted that in addition to still very high inflation, Latvia's extremely weak industrial output was another cause for concern. In May 2008, industrial output in Latvia slipped to the level of the first half of 2005 as retail sales continued to drop as well.
"Given the quite unpleasant trends of the world economy, especially looming problems in the euro zone and neighboring countries, with which we have very close economic ties, it is still too early to hope that the hardest phase is already behind us," Cirulis said.

"Although the monthly figures are of seasonal character, 12-month price hikes for clothes and footwear reached just 1 percent, indicating toughening competition. As retail sales keep declining, other retailers are also likely to face difficulties regarding rising costs, which is why they will either have to seek new approaches to their customers enhancing quality and service, or try to survive at the cost of profitability," he added.

Commenting on possible price changes over the next few months, the bank analyst noted that July and August traditionally have been the months when price hikes tend to subside. "Moreover, depending on how the public utilities regulator solves the issue of tariff hikes for natural gas, and adding the annual seasonal jump in education costs in September, concerns remain of a serious price surge later in the fall," concluded Cirulis.