The Euro Region’s Fastest Inflation Is Starting to Bite

The quickest inflation in the euro region is beginning to exact its toll on growth.

The economic expansion in Lithuania is being held back by rocketing consumer prices, according to the central bank and finance minister. Inflation shot up to 4.8 percent in September, three times the currency area’s average. Meanwhile, data released this week showed gross domestic product rose an annual 3.1 percent last quarter, slowing for the first time in more than a year.

“It’s clear inflation has had an impact on domestic demand – its growth is already slipping,” Finance Minister Vilius Sapoka said in an interview with a local radio station this week. “Looking ahead, economic growth will be slower but more balanced.”

Surging prices and GDP in the three Baltic countries, which all use the euro, have brought back memories of the boom-bust-cycle that sank their economies back in 2008. It’s also prompted questions over whether the European Central Bank’s super-loose monetary policy is appropriate for all of the nations subjected to it.

There are also some local factors at work in Lithuania. Labor shortages drove wages up an annual 8.7 percent in the second quarter, while the government’s crackdown on alcohol consumption – the world’s highest – has pushed the cost of a beer up by almost a third in the past year.

While the effect of the new booze taxes will fade next year, bottlenecks in the labor market are set to persist, exacerbated by an exodus of Lithuanian workers to higher-paying jobs in western Europe. That means more headwinds for the economy, with the central bank warning worse could be yet to come.

“Inflation continues to increasingly hamper purchasing power and consumption growth.”
Source: Bloomberg

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