By David Barwick – FRANKFURT (Econostream) – European Central Bank Governing Council member Gediminas Šimkus said Thursday that Lithuanian inflation was set to exceed 6% by year-end, with energy accounting for more than a third of price growth and prolonged high fuel costs increasingly weighing on the economy.

Šimkus, who heads Lietuvos bankas, told Lithuanian public broadcaster LRT that the current shock was broader than fuel alone, pointing to sharply higher oil, gas and biofuel prices driven largely by geopolitical developments.

“Energy now accounts for a third, even more, of inflation,” he said. “We calculate that annual inflation will reach above 6% by the end of the year.”

High fuel prices should not be dismissed simply because consumers continued to fill their cars, Šimkus said, warning that a prolonged increase would inevitably affect economic activity. He likened the effect to corrosion in the “locomotive” of the Lithuanian economy: growth might continue, but damage would accumulate and eventually have to be addressed.

Although average wages were projected to rise 9.4% this year, implying further gains in real incomes, stronger wage demands aimed at compensating for higher inflation could become problematic, according to Šimkus. “If people started demanding that wages compensate even more for the higher level of inflation, that would mean we already have some deterioration in competitiveness,” he said.

The rise in fuel costs was also redirecting household spending away from other goods and services, Šimkus said. For a motorist using around 60 liters of fuel a month, an increase from roughly €1.50 to €2.30 per liter would absorb about €50 more each month, money that would consequently not be spent elsewhere, he said.

Rather than repeatedly devising measures whenever fuel prices rose, Lithuania could consider an automatic fiscal mechanism triggered once prices exceeded a specified threshold, Šimkus said. Additional value-added tax revenue generated by unusually high fuel prices could be accumulated and later used to offset higher fuel costs or finance a lower excise duty, he said.

Fiscal policy itself had contributed materially to Lithuania’s inflation differential with the rest of Europe, Šimkus said. Without the effect of tax-policy changes, Lithuanian inflation would be “more or less” in line with that of the European Union, he said, citing the removal of the reduced VAT rate for heating among the domestic factors pushing inflation higher.

At the same time, Šimkus argued against reinstating broad-based heating subsidies, saying social assistance should instead be targeted at those who actually needed it. “Social support must be targeted, it must be precise,” he said.