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Elevated prices to persist through next few months

18 December 2021 12:46 am - 11     - {{hitsCtrl.values.hits}}

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  • Consumer prices hit a 10-year high as Nov. inflation was recorded at 9.9%
  • “Sri Lanka may enter an era of high inflation in next few months”- ICRA Lanka
  • ICRA Lanka to revise full-year growth forecast due to disappointing 1.5% contraction in 3Q

Credit rating agency ICRA Lanka said consumer prices, which hit nearly a decade high last month, indicate that the economy might have entered an era of higher prices and the trend could persist in the next few months, proving that it is no longer transitory as repeatedly claimed by the Central Bankers. 


The Central Bank in November said inflation could accelerate in the near term but expected such spurts in prices to be largely “transitory”, a term widely used by central banks around the world to define price pressures caused largely by supply chain disruptions. Until recently, they believed the supply-side inflation would abate on its own. 


But the United States Federal Reserve on Wednesday dropped the word altogether and indicated that inflation is the greatest to the US economy at present, prompting it to double the pace of the tapering of its bond buying programme, which pumped the markets with a massive US $ 120 billion worth of money every month since the beginning of the pandemic.


American inflation hit nearly four-decade high in November, when consumer prices rose by 6.8 percent from a year earlier period.     

 
Some local economists and analysts view that the consumer prices, which surged by 9.9 percent in November 2021, the highest since July 2012, might be the peak inflation and prices would start decelerating thereafter, due to both the base effects of the previous period and the easing of supply chain bottlenecks caused by the pandemic. 
But ICRA Lanka thinks otherwise. 


“Inflation jumped to record level in November, driven by supply shocks. In this context, Sri Lanka may enter an era of high inflation in the next few months,” the rating agency said in its monthly economic update released yesterday. 


ICRA Lanka has a track record of largely been accurate in their inflation forecasts in previous occasions. 
Rising inflation in turn put upward pressure on bond yields and thereby the market lending rates as the bond holders seek higher returns to protect themselves against negative real returns. 


Under these circumstances, ICRA Lanka continues to weigh in on the rising lending rates, which could then dampen the demand for private credit. 


The private sector credit growth also decelerated quite substantially during September and October after hitting a peak in August. Slowdown in private sector activities could slow the recovery of the economy, which contracted by 1.5 percent in the third quarter.


The September quarter disappointment has prompted the ratings agency to cut its full-year growth outlook. 
“In light of this, we will be revising our earlier GDP projection for 2021 (3.4 percent) shortly,” ICRA Lanka said. 
“The CBSL expects the economy to record 5 percent growth this year, which we feel is optimistic, especially given the country has recorded two quarters of economic contraction,” it added. 


Under these circumstances, the Central Bank has a difficult balance to maintain through its monetary policy, as early increase in rates could decelerate inflation but dampen the growth prospects for the economy, which has had sub-par growth rates for five years before shrinking by 3.6 percent in 2020, due to the pandemic. 


Another virus wave could be disastrous for the economy, which has shown strong signs of recovery in the ongoing fourth quarter, the PMI data for October and November showed. 


ICRA Lanka, in reference to  the Omicron variant, which is currently sweeping across Africa, the UK and Europe and North America, underscored the significance of keeping the situation under control to avoid further disruptions to the economy, which cannot afford another lockdown. 


“Though mild, the rapid rate at which Omicron is spreading is somewhat alarming,” the rating agency said. 
“It is important to keep the situation under control to avoid further disruptions to the economy,” it added. 


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  Comments - 11

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  • Kikazaru Saturday, 18 December 2021 09:13 AM

    Good. "දැන් කටිට කාපල්ලා".

    Jude Saturday, 18 December 2021 09:17 AM

    No solution for the inflation!! It's gonna be worse before it gets better!! 'Coz government have absolutely NO plan !!

    Jude Saturday, 18 December 2021 09:32 AM

    අම්මපා!!! වතුර කපනවා, ලයිට් කපනවා හැමදාම!! පෙට්රල් නැහැ, කෑම නැහැ, කෑම තිබුණත් උයන්න ගෑස් නැහැ, සල්ලි තිබුණත් පෝලිමේ ඉන්න ඕනේ වරු ගණන් හාල් සීනී කිරිපිටි ගන්න!! මේක මිහිපිට අපායක් බං!!

    Jude Saturday, 18 December 2021 09:38 AM

    Lankans should be awarded Nobel prize for being so tolerant and for the amazing patience!! WOW!!

    Jude Saturday, 18 December 2021 09:44 AM

    If this situation arises in another Place then there'll be serious protest with bloodbath !! Yeah, Lankans have become so Timid and Contend !! Yeah!!

    Ramesh Saturday, 18 December 2021 11:25 AM

    Yes! After few months people will be used to it.

    Ramon Alwis Saturday, 18 December 2021 01:38 PM

    Good starve the 6.9 mil that voted to bring this Govt to power, they deserve it.

    Che Saturday, 18 December 2021 05:46 PM

    Like in the 1970's, time to eat banana stem again ..

    Rattatoulie Sunday, 19 December 2021 07:24 AM

    Giving time for the powers that be to decamp or rats wanting to jump ship!!!

    Dee Sunday, 19 December 2021 08:01 AM

    It's OK. We don't need to eat! Save this country and give us 'SAR'! - the woman in the flower skirt and purple top who went shopping in November 2019.

    Jef Sunday, 19 December 2021 09:48 AM

    Its the rich who owns all farmes in every category controls the food sector they don't worry about price increase and how the poor suffer as long as they get the good returns of investment......local producers the government must full control instead handing over to private sector to control the proper pricing etc....someone need to put a stop work on proper manner with turnover specialy in extremely difficulties given the pandamic etc..


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