Financial Times

Sri Lankan inflation constantly rising since January
 

Six months after the Central Bank (CB) presented its Monetary Policy Roadmap for 2008, highlighting the importance of keeping inflation at sustainable, low and predictable levels to support a sustainable economic growth, statistics show that inflation has consistently risen since January 2008 to levels that are highest in the entire region. Statistics released by the CB this week again show an increase with inflation at 28.2 percent in June 2008, up from 26.2 percent the previous month.

International oil prices have surged beyond a record high of US$140 per barrel this past week and speculation is widespread that prices will reach US$150 before long, renewing fears of a global economic slowdown. Coupled with increases in commodities and food prices, inflation is likely to keep climbing and will affect countries such as Sri Lanka which are import dependent for their energy needs, economists say.

Even India, the largest economy in the South Asian region which has been experiencing remarkable economic growth over the past few years is not immune to rising inflation, although at far lower levels than Sri Lanka. India which imports roughly 75 percent of its crude oil requirements has seen inflation reach 11 percent in mid June 2008, the highest level since 1995, attributed to high fuel and food costs.
Sharp rises in the local prices of petrol, diesel and kerosene due to the partial removal of subsidies last month has resulted in transport price hikes in the rail and bus transport sectors, a likely factor in pushing up inflation levels said Dr. Muttukrishna Sarvananthan, Principal Researcher at the Point Pedro Institute of Development. He added that at present, it is very difficult to detect any other factors contributing to the rising inflation such as money printing or increase in government borrowing because it will take a long time for that data to be released.

Director of Economics Research at the CB, Dr. P.N. Weerasinghe attributed the current high inflation to be mainly due to the pass through of high international fuel and commodity prices. "If those prices stabilize at current levels, inflation is expected to decelerate towards the end of the year," he said. "The Central Bank would continue to maintain a tight monetary policy stance in order to contain excessive demand until there will be clear signs of deceleration of inflation."

An International Monetary Fund (IMF) study titled 'Commodity Price Surge Boosting Inflation, Hitting Budgets' published on July 1, 2008 paints a bleak picture on the macroeconomic impact of higher fuel and food prices. 'Higher food and fuel prices are having serious macroeconomic effects throughout the global economy, including adverse effects on growth and inflation, and creating large swings in the terms of trade—all with important balance of payments repercussions' the study found. Net importers of oil and food are being hit very hard by the commodity price shocks, with negative impact on their budgets, according to an IMF analysis which found that if oil and food prices continue to spiral, it could lead to unsustainable fiscal positions and undermine the health of government finances in some countries.

According to the study, higher commodity prices have already led to substantial increases in headline inflation, and have been quite widespread and dramatic in both low and middle income countries. The IMF contends that food prices, rather than fuel prices, have the most dramatic impact on inflation. 'This reflects a high weight of food in the consumer price index which on average allocates food a weighting more than five times that of fuel. Fuel prices can of course feed through to other prices through second-round effects but the immediate impacts on inflation are still dominated by food prices.'

 
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