The Central Bank expressed confidence yesterday that inflation will be moderate after April.
It said that inflation increased in the beginning of the year, mainly due to the rise in prices of several varieties of food items, primarily owing to supply disruptions caused by the adverse weather conditions that prevailed in major producing areas.
The annual average inflation, as measured by the Colombo Consumers’ Price Index (CCPI) (2002=100), increased to 6.1% in February from 6.0% in January 2011, while the year-on-year inflation increased to 7.8% as anticipated. However, with the increased supply of vegetables and other crops in the market since the last week of February, a gradual reduction of prices, particularly, most varieties of vegetables, rice, fish and sea food, big onion, red onion, potato, coconut and coconut oil etc. has been observed.
“As a result, the Index is expected to decrease in March 2011 compared to that in February 2011. However, inflation on year-on-year basis is likely to increase to around 8% in March 2011, due to the low base in March 2010. Meanwhile, 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,” Central Bank said.
Nevertheless, 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.
The performance in the key sectors of the economy has raised the prospects for high economic growth in 2011, which would contribute positively towards containing inflation. However, unpredictable weather conditions could impact negatively causing temporary price increases. The 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.
The ongoing fiscal consolidation process has lowered the fiscal deficit and the need for the government to borrow from the banking system, thereby reducing demand side pressures on inflation. In terms of capacity utilisation, space to increase production within the existing capacity as well as the expansion of the existing capacity, are likely to further mitigate inflationary pressures. Meanwhile, the appreciating trend of the rupee in the foreign exchange market is also expected to mitigate the impact of adverse movements of international commodity prices on domestic inflation.