After a brief truce, US-Iran tensions have risen again, with Brent crude oil prices climbing from around $70 to $85 per barrel in a short period. Lithuania is more sensitive to rising oil prices than its neighboring Baltic states, as fuel accounts for almost 6% of Lithuanian household expenditure – the largest share in the region. The question now is not whether confidence will hold for a third time, but how much a prolonged oil price shock would cost Lithuanian businesses and households if prices do not quickly subside.
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Two Shocks – Different Impacts on the Lithuanian Economy
When Russia invaded Ukraine in February 2022, the shock was structural: European gas supplies, trade routes, and industrial raw material chains were disrupted overnight, and the eurozone economic sentiment indicator fell by 9.6 points in six months. Lithuania’s overall confidence indicator fell similarly – by 6.9 points, but the decline was more concentrated in businesses rather than households: industry decreased by 5.8 points, services by 7.5, retail trade by 8.2, construction by 9.5, while consumer confidence decreased relatively little – by 6.4 points.
The 2026 conflict over Iran affected the economy completely differently. It reached Europe mainly through oil prices and shipping risks around the Strait of Hormuz, rather than through the gas market, so the eurozone indicator fell by only 4.0 points. Lithuania’s indicator decreased by just 2.2 points, and confidence in services even increased by 1.5 points, construction by 2.6, while industry, retail trade, and consumer confidence decreased only slightly – by 2.9, 4.2, and 2.9 points respectively. In our assessment, this reflects the domestic business cycle, which continued to strengthen even as external risks re-emerged.
Rising Oil Prices Affect Inflation in Two Stages
Our data shows what a sustained higher Brent crude oil price would mean for inflation. Rising oil prices affect it through two channels. A quick and direct one, where fuel, heating, and transport prices change almost immediately with the oil price, and a slower, indirect one, where higher energy and transport costs are gradually passed on to the prices of other goods and services.
The direct impact is quickly reflected in headline inflation, while the indirect impact on core inflation can accumulate for a year or more. It is significantly harder to stop when rising prices also start to push up wages.
Lithuania Most Sensitive to Direct Price Shock
According to our data, if Brent crude oil prices remained around $85 for two months, eurozone headline inflation would increase by approximately 0.42 percentage points over the next year, and Lithuania’s by about 0.61 percentage points. This would be the largest increase among the Baltic states, compared to 0.49 points in Latvia and 0.45 points in Estonia. The reason is simple – fuel accounts for almost 6% of Lithuanian consumer spending, compared to approximately 4% in Latvia and 3.7% in Estonia – which is close to the eurozone average.
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If tensions were to escalate further and Brent prices remained around $100 for a longer period, the impact would be approximately twice as large: Lithuania’s headline inflation would increase by about 1.22 percentage points, compared to 1.0 points in Latvia and 0.9 points in Estonia.
However, core inflation estimates show a different picture: in this case, it would increase by about 0.16 percentage points in Lithuania – slightly less than the 0.19 and 0.18 points expected in Latvia and Estonia. The economies of these countries are generally more energy-intensive, and lower average incomes provide less room to absorb increased costs without passing them on.
Thus, the direct impact of the renewed oil shock will be felt most quickly and strongly in Lithuania, given the large share of household budgets allocated to fuel, even if the slower, economy-wide impact may ultimately be slightly smaller than in Latvia or Estonia.
According to our baseline scenario, this would be a limited, temporary price change, rather than the beginning of a structural inflation problem, if Brent prices stabilize near current levels rather than rising towards $100 and staying there. The risk worth monitoring over the next one or two years is the indirect impact on wages and other prices. If higher fuel and transport costs persist long enough to trigger demands for wage increases, rising core inflation would be significantly harder to manage than the initial price shock.
