Veggie softener for inflation hike?

Monday, 20 February 2012 00:00 - - {{hitsCtrl.values.hits}}

Sharp reduction in vegetables prices thanks to higher output could help soften an otherwise sharp spike in inflation following the unprecedented fuel hike and devaluation of the rupee, according to analysts.

In recent weeks, prices of vegetables have dropped by as much as 50% or more and this development will make the additional cost following fuel-prices-linked revision in transport charges less expensive.

A sample of vegetable prices reveals the reduction. For example a kilo of cabbage was Rs. 40 as opposed to Rs. 91 a year earlier whilst prices of carrots, beans and tomatoes have come down as well.

Traders previously attributed the drop in prices to higher output of these vegetables on account of better yield as well as expanded area of cultivation. Some vegetables have experienced a glut which had previously threatened income of farmers.

Whilst some analysts forecast this development to soften expected spike in inflation, others said that higher transport cost may change the scenario. The Government raised prices of diesel by 36% last week and the revision in transportation cost will be reflected next week. Opposition parties have however warned of serious burden on the people owing to the fuel hike which has triggered a chain reaction in upward revision in prices of several essential goods and services.

Veggie softener Last week two massive protests against the crisis in the economy were dealt with force and violence injuring several.

The Opposition has condemned quelling of democratic protests by violence means by the Police whilst the Government has levelled charges against the Opposition as well.

Inflation, as measured by the change in the Colombo Consumers’ Price Index (CCPI, base 2006/07), has continued to moderate, with year-on-year inflation declining to 3.8% in January 2012 from 4.9% in December 2011. Central Bank said this was the 36th consecutive month with single digit inflation, improvements in domestic food supplies such as most varieties of vegetables, potatoes and big onions mainly contributed to the continuation of low inflation, whereas non-food inflation showed an increase during the month. Meanwhile, year-on-year core inflation in January 2012 remained unchanged from the previous month at 4.7%.

To keep the inflation at single digit level the Monetary Board took several key decisions such as increase the policy rates and curtail credit.

However interestingly the twin move of near free-float of the exchange rate and the fuel hike came after the monetary policy review, and when the Monetary Board meets next the change in the status quo will be pose a fresh challenge.

The rupee dipped to Rs. 119 to the US Dollar by Friday as opposed Rs. 114 a week earlier and Rs. 111 a year ago.

Most analysts noted that oil prices and imports remain the biggest challenge for the Government in managing the upward pressure on inflation though import-cost push will be under watch. India is Sri Lanka’s biggest source for imports and devaluation of its currency has been helpful with regards to imports from the giant neighbour.