What do experts think is behind rising prices in Lithuania?

Lithuanian political observer Rimvydas Valatka has argued that that rising prices have to do with the European Central Bank‘s quantitative easing programme, in which the ECB president Mario Draghi “promised to print out a trillion euros over 20 months”.

Economists disagree with such an explanation, however. MP Kęstutis Glaveckas, deputy chairman of the parliamentary Budget and Finance Committee, said that only a small fraction of the money from the ECB’s programme went to consumption, too little to raise consumer prices significantly. Besides, the eurozone reported 0.2% deflation over the first months of this year, despite the quantitative easing (QE) programme.

Economist Aušra Maldeikienė said that “if price rises were directly linked to quantitative easing, they would be happening throughout the EU” which was not the case.

Raimondas Kuodis, deputy chairman of Lithuania’s central bank, added that most laypeople have an incorrect understanding of how money is produced, leading them to inaccurate conclusions about the impact of QE.

“It’s a process where central banks buy up bonds. Sellers of the bonds don’t become richer, they just exchange one form of assets for another. Most of the ‘printed’ money remains at the central bank, it is prevented by institutional checks from entering the economy and exerting significant influence on it,” Kuodis told LRT.

Imagined rises?

Pricing in the market has to do with psychological as well as economic factors according to Glaveckas: when people start talking about rising prices and develop expectations, prices do start rising in response.

Meanwhile Kuodis said that ordinary consumers often misinterpret price fluctuations, which can be seasonal and relatively short-term, to make sweeping conclusions.

“There is a lot of talk in Lithuania about relative price changes, when, say cauliflowers get more expensive, but milk gets cheaper. It is in people’s psychology to concentrate more on exceptional price hikes than cases of lowering prices, which leads to resentment. People fail to recognize temporal fluctuations, which could be seasonal, and jump to conclusions. In fact, inflation is quite low in Lithuania right now,” he said.

How prices rise

Kuodis noted that while prices have been moving upwards so has consumption.

“If prices rose faster than income, we could expect an economic downturn, people consuming less. The only way to keep consumption levels up in that case would be by increasing household debt, but households are not currently inclined to borrow,” he said.

Maldeikienė believes that unaccounted income and foreign remittances play a crucial role in the growing consumer prices.

“If demand grows, retailers up their prices. It is clear that, in view of our official income figures, the prices are already unrealistically high. So the question is: where do people get the money from to buy things? Some continue to receive remittances from abroad. But this form of income should decline, because there are fewer people receiving money from their relatives abroad.

“However, some people also enjoy additional unaccounted income. In such a situation, the most hard-pressed are those who neither get money from abroad nor illegal income,” Maldeikienė said.

Government incapable of fighting black market

Even though the Lithuanian government keeps boasting about successful efforts to fight the black market, Maldeikienė thinks its actual record is rather poor.

“This government has not cut the black market one bit. They fail to approach the problem systematically. They believe it’s enough to pick one aspect, fix it and the situation will get better,” she said.

“However, people tend to stick to the general rules of the game, they do what the system demands from them. And the current system demands that they accept illegal pay, because the only choice is between no job and a job with illegal pay.

“The black market is a moral phenomenon. Catching individual players does not tackle the black market, the system should fight it,” Maldeikienė said.

Kuodis agreed that the biggest black market in the country was in Lithuania’s labour market while the government kept focusing on fighting fuel smuggling.

MP Glaveckas insisted that the black market responded to economic growth: if the economy is doing well, the black market shrinks, but a shadow economy prospers during economic stagnation.

“One should not expect that the black market will recede from administrative measures alone. It is possible gradually, but achieving good results without economic growth is unlikely,” he said.