According to the economist, in the first half of this year, the surge in energy prices caused by the Middle East crisis affected all European countries similarly, although different countries applied different support measures and tax breaks.
Read more Linas Linkevičius. Don’t let Russia get out of its own mess
“In our assessment, the energy price shock added approximately one percentage point to inflation. However, in Lithuania, we have many internal reasons why inflation is higher than in neighboring countries,” said N. Mačiulis.
According to him, one of the most important reasons is the increased excise duties on alcohol, tobacco, and fuel this year, and the abolished VAT exemption for centralized heating and hot water.
According to the economist’s calculations, these tax changes contributed approximately 1.5 percentage points to annual inflation.
However, according to N. Mačiulis, rapidly growing labor costs have an even greater impact.
“In Lithuania, labor costs are growing much faster than productivity. Here it’s simple math and economic logic – if labor cost growth exceeds productivity growth, that difference is usually reflected either in lower company profit margins or higher inflation. That’s what we are seeing,” explained the economist.
Read more Deputy Minister of Environment responsible for construction – Asta Rokickienė
In his assessment, this factor alone contributes another approximately 2 percentage points to inflation.
N. Mačiulis also drew attention to household consumption. According to him, with more than a billion euros from accumulated long-term savings entering the economy, demand increased, which particularly affected the service sector.
“Prices rose in some sectors. Not so much for household appliances, where supply is flexible and more can be imported quickly, but for hotels, restaurants, healthcare, and other services. In these areas, supply is not flexible; you cannot suddenly increase capacity to feed, accommodate, and provide wellness services, while demand has grown. Therefore, growing demand is reflected in faster price increases,” he said.
However, the economist emphasized that he does not believe the decision to increase excise duties or abolish the VAT exemption for centralized heating was wrong. According to him, this exemption was ineffective because it did not reach the residents who needed help the most.
“But generally, a large part of inflation is due to populist economic policy mistakes; if you make one-time cash injections – whether borrowed funds or from long-term savings – the first economic law learned in the first year is that it will turn into higher inflation,” N. Mačiulis shared his thoughts.
