After a period of sustained inflation, Lithuania has reported a monthly drop in the general price levels in December. This is good news for shoppers and people with mortgages, says an economist, although prolonged deflation would not be good news for the economy as a whole.
The overall price level in Lithuania is falling, statisticians say. In December, monthly deflation stood at about half a percent. Economists say this is largely due to retailers reacting to falling consumption as well as a drop in energy prices.
Lithuania is estimated to be among the biggest spenders on food in Europe. On average, Lithuanians spend around 220 euros a month on food, about a fifth of their total expenditure, according to a study.
But there is no lack of optimism about the economy. The Consumer Confidence Index, an indicator of how people feel about their own and their country’s financial situation, rose in December.
“[Annual] inflation is already below 2 percent, which is very welcome. Deflation in December was 0.6, a repeat of the historical record for deflation in December,” Aleksandras Izgorodinas, economist at Citadelė Bank, tells LRT TV.
According to him, the last time Lithuania saw such a large price drop in November-December was in 2014.
“This clearly shows that when energy prices actually fall and consumption slows down, companies rush to offer consumers all sorts of discounts and incentives. In order to bring consumers back to shops,” he says.
The economy is gradually returning to normal after a period of high inflation, he claims.
“The price level is indeed normalising, but I admit that this is a baseline scenario. There are a lot of geopolitical risks, there are risks on oil, on gas, which could significantly change this good news next year. But these are not baseline scenarios. I think we are looking at a further slowdown in inflation,” according to Izgorodinas.
It is very likely that annual inflation will fall even further in spring, he reckons. “Next year, the economic cycle in Lithuania should accelerate and industry should recover,” he says.
However, falling prices can change consumer behaviour and influence business decisions.
“Deflation is not good for the economy. It is even worse news than inflation. When prices start to fall, people don’t buy goods and services, they wait for them to get even cheaper. Companies cut prices, but people don’t respond by buying because they are waiting for them to get even cheaper,” explains Izgorodinas.
High inflation has led to interest rate hikes and higher payments for mortgage holders. The pressure will ease next year, the economist believes.
“There is a lot of good news for households next year. The markets expect the European Central Bank to start cutting interest rates from Q2, and to do so five times,” he says.
Wages are also expected to rise.
“People should already be feeling a much lighter mortgage burden next year, in the 2nd half of 2024. We forecast that next year the average wage will increase by around 7 percent, inflation will be around 2 percent, but could be lower,” Izgorodinas says.
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