Sharp increase in Lankan inflation

by Sunimalee Dias

(April 11, Colombo, Sri Lanka Guardian) Inflationary pressure in the system has resulted in March figures increasing by a whopping 8.6% compared to the same period last year. This clearly goes against the Central Bank’s projection of a further decrease in inflation in March compared to the February figure of 6.1%.

Economists believe this is due to an increase in inflationary pressure and not the bad weather pattern. In fact it was noted that inflation has increased over 10 fold from September 2009 at 0.7% to March 2011 at 8.6%.

This has been the biggest increase in a long time, Economist and UNP MP Dr. Harsha De Silva told the Business Times. The figure has gone up by 0.3% from February to March of this year while inflation year on year for these two months was at 7.8% to 8.6%.

He noted that should the Central Bank continue to follow ‘easy money’ policies then it would not help to bring down inflation if there is demand side inflation. The Central Bank noted last week that inflation on a year-on-year basis is likely to increase to around 8 per cent in March 2011, due to the low base in March 2010.

It said a marginal increase in the annual average inflation is also estimated. The upward trend is expected to continue in April 2011 as well, mainly due to the festive demand and the base impact.

Senior economist Nimal Sanderatne speaking with the Business Times observed that it was important to find out whether the government has any plans to pass on the oil price increases to the consumers with rises going up to over US$110. in this respect, the government is incurring quite a bit of a loss, he said adding that it was now faced with the dilemma of whether to subsidise it or not. This, he noted, could eventually result in an increase in the fiscal deficit.

The government expects food prices to come down due to international prices lowering and harvests set to bring down the levels, Dr. Sanderatne said. The Central Bank stated that “with stocks being released to the market and the expected increase in the extent of cultivation during the Yala season, prices are expected to remain low during the latter period of the year. Accordingly, year-on-year inflation is expected to decelerate from May 2011 onwards to reach 6.0-7.0 % by the year end, although annual average inflation may follow an increasing trend during the balance period of the year to record around 7 % by December 2011.”

However, these are all dependent on the oil prices, Dr Sanderatne said adding that, “I don’t subscribe to that view” of a one-off increase in inflation due to price increases in oil. It was noted that this had a multiplier effect with one price increase set to feed into another.

But the government notes that a “continuous increase in the prices of key international commodities, especially that of crude oil, could also cause a one-off increase in inflation if it is passed through to domestic consumers. Even if such price increases are not passed on to the domestic consumers, the contribution of imported items to the annual average inflation would increase from around 20 % in February to around 24 % in December. Under this scenario, the contribution of imported items to year-on-year inflation would decline over time.”

Dr. de Silva, making these sentiments stated, “I don’t think it’s prudent to say its one-off” because the government was being pushed by the International Monetary Fund (IMF) to ensure zero losses at the CPC and CEB.