Sri Lanka Annual inflation declines

Sri Lanka says its annual average core inflation has declined to 6.3 per cent in 2010 from 9.2 per cent in 2009 indicating a reduction by 2.9 percent. The year-on-year core inflation also followed a declining trend reaching 5.6 per cent at the end of 2010 compared to 5.9 per cent at the end of 2009.

The Central Bank of Sri Lanka announced that the annual average rate of inflation, as measured by the Colombo Consumers’ Price Index (CCPI) (2002=100), computed by the Department of Census and Statistics, was 5.9 per cent in 2010.  It is noteworthy that this is the second lowest annual average (end year) inflation rate observed   since 1999. The year-on-year inflation stood at 6.9 per cent in December 2010.

Favourable domestic supply conditions due to improvements in the agriculture sector as well as increase in supply of food commodities, mainly from the North and East helped contain   price pressure to a certain extent, although seasonal increases of prices of some commodities were experienced during some months of the year.

The impact of world price escalation on the domestic inflation was arrested by import duty revisions. Further, the unchanged prices for petrol and diesel during the year helped contain inflation. Prudent monetary policy also supported preventing   inflation from rising.

Paddy production in 2010   improved when compared to that of the previous year and the   average price of rice recorded a drop in 2010 compared to 2009. To check the rising rice prices during the closing months of the year, the government re-imposed the price ceiling w.e.f. 10.12.2010 which was removed w.e.f. 26.10.2010, and started releasing paddy stocks to millers and distributing rice through Co-operatives and Sathosa outlets at a lower price.

Unlike in 2009, prices in the import category in the CCPI basket contributed to inflationary pressure in 2010.  Import duties were adjusted on imported items from time to time to reduce the impact of high import prices on domestic inflation. The contribution of imported items to annual average inflation, increased from negative 10.0 per cent in 2009 to 14.8 per cent in 2010, while the contribution of  omestic items decreased from 110.0 per cent in 2009 to 85.2 per cent in 2010.  Accordingly, the average domestic prices of wheat flour and milk powder decreased while the price of sugar increased, compared to 2009.

The impact of high import prices on consumer prices was somewhat mitigated by the slight appreciation in the exchange rate.  The Sri
Lankan rupee appreciated by about 1.7 per cent against the US dollar on average in 2010.

The annual average core inflation, which is derived by excluding food and energy items from the CCPI basket, declined to 6.3 per cent in 2010 from 9.2 per cent in 2009. The year-on-year core inflation also followed a declining trend reaching 5.6 per cent at the end of 2010 compared to 5.9 per cent at the end of 2009.