Consumer inflation accelerated to 3.9% y/y in July from 3.5% y/y in June, the stat office reported on Tuesday. This marks the strongest rate of increase since late 2011 and inflation so far this year has remained above the 3% y/y mark during all months except for January. The acceleration in July was mostly on the back of food prices, utilities and transport prices. Food prices have been rising recently due to the poor harvest season in some parts of Europe this year while the expiration of the reduced VAT applied on district heating and hot water is pushing utilities prices higher. Transport prices rebounded to 3.8% y/y in July likely as a result of the stabilization of oil prices as well as higher demand. Prices of alcoholic beverages and tobacco continued to increase strongly (up by 11.7% y/y) due to higher excise taxes.
All in all, consumer prices accelerated more than we expected as several factors are now in play that are pushing prices upwards. Higher consumer prices are favorable news for companies operating in Lithuania which will boost their revenues while the government is also benefiting through higher tax revenues. Still, consumer prices are once again becoming a sensitive issue for households as a recent survey found that rising consumer prices is one of the biggest concerns for Lithuanians at the moment. Food prices in particular have become largely discussed recently with calls from the junior ruling LSDP to introduce reduced VAT rate for some foods. PM Saulius Skvernelis several times reiterated that higher completion among retailers is the only sustainable way to reduce food prices which we see as good news if this materializes in reduced administrative burden for business in Lithuania.