December inflation accelerates to 4.1% as food prices spike

Sri Lanka’s headline inflation in capital Colombo accelerated to 4.1 percent during the 12 months to December from 3.4 percent due to faster rise in food and beverage (F&B) prices and moderate increases in non-food prices, the data released by the country’s Statistics department showed. 
The inflation measured by the Colombo Consumer Price Index (CCPI) rose by 1.9 index points or 0.99 percent to 192. 8 during December from a month ago. 
However, the Central Bank last week attributed these spikes to transitory movements and thus left its key policy rates unchanged with the expectation of inflation remaining at mid-single digit levels in the period ahead. 
Sri Lanka’s CCPI headline inflation now remains lower than the upper limit of the inner band set by the International Monetary Fund for inflation by end December 2016 which is 6.4 percent. 
The annual average inflation for December was 3.7 percent, up from 3.6 percent in November. The Central Bank’s inflation target for 2016 was 5.0 percent. 

The F&B prices rose by 1.7 percent from a month ago due to weather-hit supply conditions or some varieties being off-season.
 Among the food prices, the rise in prices of rice has been the highest because the harvest was hampered by the prevailing drought. Economists have warned of continued higher rice prices with prolonged drought conditions. 
It is estimated that only 1.7 million tonnes of paddy were produced during the 2016/17 Maha season, significantly lesser than 2.9 million tonnes during the 2015/16 Maha season. 
Storage levels in most tanks after the North-East monsoons have also come down to 25 to 30 percent levels and the irrigation office has also restricted issuing water for agriculture to preserve water for drinking purposes in the dry zone.   
Meanwhile, core-inflation, the underlying inflation in an economy measured excluding items such as fresh food, energy, transport, rise and coconut, continued its upward trend through December as it jumped to 6.3 percent from 5.1 percent in November. 
“Core inflation increased noticeably during December 2016 mainly reflecting the effect of government tax changes”, the Central Bank said in its December monetary policy statement. 
On a year-on-year (YoY), basis food prices rose by 3.8 percent in December, accelerating from 2.9 percent in November.  
The prices of non-food category grew by a moderate pace of 0.4 percent in December on a month-on-month basis compared to 1.2 percent increase in November. 
Much of the impact stemmed from the education subcategory where the tuition fees have risen significantly in December. 
Further sub-categories such as health and communication too saw increases most likely due to higher Value Added Tax that came into effect from November.
The prices of recreational and cultural activities, utilities such as housing, water, electricity and gas saw declines. 
However, the rising global crude prices, declining hydro-power capacity, rapid increase in personal vehicles on roads could force the policy makers to pass the cost to the consumers as the government has no fiscal space to absorb the losses under its 3 -year agreement with the IMF and this could push up the inflation further north, economists opine. 
Further, the rising dollar, the Central Bank’s policy of floating exchange rate could also weigh on the prices as Sri Lanka is highly dependent on imports. This could push Sri Lanka to tighten its monetary policy further and cut economic growth, unless foreign inflows picked up.