Lithuanian Government Sees Faster Inflation, Reversing a Deflation Call

Lithuanian consumer prices will probably rise this year because of higher commodity and food prices, the Finance Ministry said, reversing an earlier forecast for deflation.

The inflation rate will average 1.1 percent this year, compared with a May 13 forecast of 0.1 percent deflation, the Vilnius-based ministry said in an e-mailed statement today. Consumer prices will average 1.8 percent next year. The government reiterated its economic growth forecast of 1.6 percent for this year and 2.8 percent in 2011.

Inflation in the Baltic nation was the fastest in 10 months in July at 1.9 percent. Lithuania, which maintains a fixed exchange rate for the litai 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.

Prices will accelerate on “a depreciating euro rate against the dollar, higher global oil and food prices and also changing compensation trends,” the ministry said. The inflation rate is expected to jump to 2.5 percent by the end of the year, it said.

Wages rose 1.2 percent in the second quarter from the previous three months for the first time since 2008 as the economy began to recover and emigration trimmed the workforce.

Economic growth may accelerate to between 4 percent and 5 percent in the second half this year on export growth and “stabilization of domestic demand,” the ministry said.

Output returned to growth last quarter, driven by foreign sales and industrial production. Gross domestic product advanced 1.3 percent from a year ago after a 2.8 percent contraction in the first quarter.

Unemployment will probably accelerate to 17.9 percent this year before slowing to 16.2 percent in 2011.

To contact the reporter on this story: Milda Seputyte in Vilnius at mseputyte@bloomberg.net

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