Baltics: on a deflationary trend

• Lithuanian inflation decelerated to 1.3% in October, from 2.7% y/y in September. Latvian inflation entered negative territory, with CPI dropping to -0.9% y/y in October, down significantly from 0.5% y/y in September.

Details

Lithuania and Latvia Statistics have today published CPI inflation numbers for October. As broadly expected, the hike in VAT in September had a short-lived effect on consumer prices in Lithuania, with another significant decline in monthly CPI in October to -0.4% m/m, mostly due to the drop in heating energy prices. In Latvia, CPI moved to -0.9% y/y from 0.5% y/y in September.

Assessment and outlook

As expected, the VAT increase in September in Lithuania had a short-lived effect on CPI. In October, inflation in Lithuania resumed its downward trend. We leave our assessments of price developments in Lithuania and Latvia for 2009 broadly unchanged: average inflation should stand at 4.4% and 3.6%, respectively.

After the closure of the Ignalina nuclear power plant at the beginning of 2010, more expensive electricity will push inflation up again. It will not be a one-off hike and will probably persist for a longer period of time. Nonetheless, a continuation of the decline in wages and rising unemployment should prevail from the significant acceleration in consumer prices again. Thus, we lower our inflation forecast for 2010 to 0.3% on average.

In Latvia, we expect the deflation trend to continue in 2010 as well. A poor domestic outlook in 2010 is likely to result in even steeper price declines. Thus, we expect CPI to decelerate to -1.9% on average. The risks to our inflation projections are slightly on the upside due to the possibility of a further rise in indirect taxes and global oil prices.