The cost of living is rising in Sri Lanka, data released by the Central Bank shows, with or without the consideration of price sensitive food and fuel in measuring inflation, which is the rate at which prices increase.
The Central Bank yesterday said core inflation, which excludes price sensitive items such as fuel and food, had increased from 5.8 percent year-on-year in June to 6 percent in July.
Core inflation is measured to gauge the underlying price movements in the economy, in this case prices are increasing, although some economists argue that it was unrealistic to leave out price sensitive food and fuel prices from the core inflation index.
As reported yesterday, headline inflation reached a three year peak at 9.8 percent in July 2012 mainly driven by food prices.
The International Monetary Fund (IMF) has said Sri Lanka faces some risk from inflation: "Though growth is slowing, there is not much slack in the economy, and there is a risk of second-round effects from pass through of depreciation and energy price increases," it said in a recent staff report.
"The transition to a flexible exchange rate regime and winding down of foreign exchange market intervention has been a major achievement, and needs to be sustained. With a flexible exchange rate, the focus of monetary policy can shift increasingly to inflation control as a means for achieving broader macroeconomic stability, while allowing the exchange rate to act as a buffer for external shocks," the IMF said.
"In this context, the current monetary policy stance is appropriate, and a tightening bias should be maintained in the near term until further evidence of diminishing inflation pressures and credit demand emerge. Some two-way intervention to smooth exchange rate volatility is reasonable provided it does not adversely affect the target on reserve accumulation, while a gradual further relaxation of restrictions on banks’ open and forward positions would help to deepen the foreign exchange market," it said.
By ignoring a balance of payments crisis for more than six months, economists point out that the recent policy measures, although necessary and commendable, are hurting the people more than it would have been had these measures been taken much earlier.
The Central Bank issuing a statement on the current inflation data said: "The Colombo Consumers’ Price Index (CCPI) increased by 0.9 per cent in July 2012 over the previous month, with the Index increasing in absolute terms to 166.7 from 165.2 in June 2012. The contribution to the monthly increase in the Index came mainly from price increases in the Food and Non-Alcoholic Beverages category (by 1.6 per cent) followed by the Non-Food category (by 0.3 per cent).
"The increase in the prices of rice, coconut, fresh fish, sugar, fruits, vegetables and prepared food contributed to the increase in the food category of CCPI. The upward revision in the prices of wheat flour, fuel and milk powder has had an impact on the prices of prepared foods with a time lag.
"However, a decline in the prices of red onions, big onions and limes was also reported during the month.
"Within the non-food category, prices increased in the sub-categories of health (by 1.9 per cent); clothing and footwear (by 1.1 per cent); furnishing, household equipment and routine household maintenance (by 1.1 per cent); miscellaneous goods and services (by 0.2 per cent) and transport (by 0.1 per cent). However, prices in the sub-category of housing, water, electricity, gas and other fuels recorded a decline of 0.3 per cent due to the reduction in prices of LP gas with effect from. 14 July 2012. Meanwhile, the prices in the sub-categories of communication; recreation and culture; and education remained unchanged during the month," the Central Bank said.
"Inflation, as measured by the Colombo Consumers’ Price Index (CCPI) (2006/07=100) computed by the Department of Census and Statistics, increased to 6.0 per cent in July 2012, on an annual average basis, from 5.8 per cent in the previous month.
"The year-on-year (YoY) inflation rose to 9.8 per cent in July 2012 from 9.3 percent in June 2012, mainly due to the price increases in food category. Meanwhile, core inflation, continued its decelerating trend for the tenth consecutive month and reached at 5.5 per cent in July 2012, on an annual average basis, from 5.7 percent in June 2012, while increasing on a (YoY) basis to 6.0 per cent in July 2012 from 5.8 per cent in the previous month," the Central Bank said.
