Financial Times

Inflation eases due to restricted money supply, weaker dollar

Inflation might have eased in the past three months to 24.3 % in September due to the Central Bank (CB) restricting the money supply and the weaker US dollar, an economist said.

Colombo University economist, Dr. Sirimal Abeyratne said although there are other reasons, these are two of the main reasons. He added that the weakening dollar is in effect stabilizing the Sri Lankan rupee and bringing down inflation. A CB press release stated that the moderation of inflationary pressures in the economy is expected to continue during the forthcoming months as well, benefiting from the favourable impact of the containment of aggregate demand in response to the tight monetary policy stance adopted by the CB and the healthy developments in domestic food production and easing of commodity prices in the international market. It said inflation which began a deceleration from July 2008 continued on the same path for the third consecutive month for September 2008. As measured by the Colombo Consumers' Price Index (CCPI), inflation on a year on year basis recorded 24.3 % in September 2008, falling further from 24.9 % recorded in August 2008. However, the monthly index recorded a slight increase of 0.4 % over the previous month, raising the expenditure value of the index by Rs.166.61 while the annual average inflation rate moved from 22.6 % to 23.2 % between the two months, reflecting the cumulative effect of the increase in the index during the preceding 12 month period.

According to the press release, the food sub index recorded a decrease of 0.3 % in September over the previous month, mainly due to the decline in prices of fish, coconut and coconut oil, vegetables, meals bought from outside, meat and pulses, consequentto the increased supply of domestic agricultural produce. This had a significant impact on the overall inflation as it account for 47 % of the total index. However, the CB noted that the total impact of this decline on the overall price level was offset by the increases in non-food categories, mainly transport, health, miscellaneous goods and services and food and non-alcoholic beverages. The increase in LP gas prices by the beginning of the month also attributed to the increase in inflation.

Meanwhile, the press release stated that core inflation, which is derived by excluding food and energy items from the CPPI basket to reflect price changes that are more responsive to demand factors, rose by 1.1% in September over the previous month, registering an annual average of 11.1% and a point to point change of 18.7% compared to 10.1% and 17.4% respectively in the previous month.

This upward movement was largely caused by the increase in furnishing, household equipment and routine household maintenance (4.6%) and recreation and culture (7.5%) subcategories. This reflects the impact of increased prices of newspaper and lotteries and the second round impact of the fuel price hike.

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