Colombo inflation in July moderates to 5.5% over VAT suspension

Sri Lanka’s headline inflation in the capital Colombo moderated to 5.5 percent in the 12-months to July from 6.0 percent recorded in June, due to slight contraction in non-food prices as the suspension of Value Added Tax (VAT) takes hold, the data from the Census and Statistics department shows. On a Month-On-Month (MOM) basis the headline inflation growth fell to 0.2 percent from 2.1 percent in June. On a MoM basis the non-food inflation fell by 0.2 percent in July against an increase of a similar percentage in June.

Prices of utilities such as housing, water and electricity declined while the prices of health and communication too dented during the month as the VAT was removed from laboratory tests and the same was suspended from telephone charges. On a Year-on-Year (YoY) basis too the non-food inflation slowed to 3.0 percent from 4.0 percent a month ago.

Meanwhile the food price index grew by a paltry 0.6 percent on a MoM basis compared to a sharp 4.3 percent increase in June. On a YoY basis the index grew by 8.1 percent, slowing from 8.2 percent a month earlier. The government imposed controlled prices on 15 essential items during the month. Vegetable prices decreased during the month, probably due to the increased supply compared to previous months. Meanwhile the core-inflation which excludes the price volatility in food and energy declined for the second consecutive month to 5.8 percent YoY in July from 6.4 percent in June but increased by 0.2 percent on a MoM basis. Worried over the rising trend in inflation, the new Central Bank Governor last week raised its key policy rates by 50 basis points to ward off any price pressures stemming from the demand side as the demand for private credit remained high.

“The Monetary Board considers that further tightening of monetary policy is required to curb excessive demand in order to pre-empt the escalation of inflation pressures,” the Central Bank’s Director of Economic Research K M Siriwardene told the reporters early Friday. In June Sri Lanka breached the International Monetary Fund’s inner band headline inflation target of 4.9 percent set for June by recording an inflation of 6.0 percent – 32 months high and closer to the upper band of 6.4 percent - triggering Staff consultation. The Central Bank wants to maintain inflation at mid-single digit levels in the medium term.