Consumer spending pushing up prices

VILNIUS - Lithuania’s inflation rate will probably accelerate more than previously estimated this year because of rising food prices and a recovery in consumption, said the central bank, reports Bloomberg. Consumer prices will increase one percent this year, compared with a May 6 forecast of 0.4 percent, Vilnius-based Lietuvos Bankas said in an e-mailed statement on Aug. 20. The bank reiterated its economic growth forecast of 0.5 percent this year and 3.1 percent in 2011.

Inflation in the Baltic nation was the fastest in ten months in July, at 1.9 percent. Lithuania, which maintains a fixed exchange rate for the litas to the euro, has been using deflation and wage cuts to restore competitiveness after a credit-fueled boom led the European Union’s second-worst recession last year.
“As private consumption is recovering more rapidly than expected in May, these prices, which depend mostly on the domestic-demand developments, are unlikely to decrease sharply,” the bank said.

The economy returned to growth last quarter, driven by exports and industrial production. Output advanced 1.1 percent from a year ago after a 2.8 percent contraction in the first quarter.
“Although the economy has reached its turning point, unemployment is expected to decline slowly,” the central bank said. Unemployment is likely to have peaked and will average 17.9 percent this year, the central bank added. Wages may fall 5.5 percent in 2010 before returning to growth of 2.9 percent in 2011, it said.

The construction industry will recover at a slower pace than previously expected. The delay will be partially offset by improving private consumption, said the bank. “Growth of private consumption will be relatively slow. It will be impeded by high unemployment, sluggish wage growth and increased savings by consumers as they are wary of the economic outlook and personal-income prospects. In 2011, household expenditure is expected to be only at the level it was in the second half of 2005,” highlighted the central bank.