September inflation slows over lower food prices but core-inflation up

Sri Lanka’s headline inflation measured by the Colombo Consumer Price Index (CCPI) has edged down to 3.9 percent during the 12-months to September from 4.0 percent in August as the lower food prices continued to buttress the prices, the data released by the Census and Statistics Department showed. 

This is the third month in a row the headline inflation has shown a decline since it reached a worrying peak of 6.0 percent in June. But the situation was brought under control when the interest rates were jacked up in July, and the higher Value Added Tax (VAT) was enforced, which was later suspended by a court ruling.

But core-inflation, the increase in prices measured excluding items such as fresh food, energy, transport, rise and coconut saw an uptick from 4.1 percent to 4.2 percent, but not worrying as it has been coming down from 6.6 percent in May 2016. 
But the 12-month moving average core-inflation remained unchanged at 5.0 percent in September. 

A fortnight ago, the International Monetary Fund (IMF) commended the Central Bank for raising interest rates by 50 basis points in July to tame the inflation within IMF’s target band but cautioned to be vigilant to further tighten if inflation and credit growth continued to rise. 
Sri Lanka’s private credit in July rose by 28.5 percent, still higher than the 18 - 20 percent levels wanted by the Central Bank by the end of the year. 
The Central Bank Governor however is of the belief that the target could be achieved as there is generally a monitory policy transition lag of between 12 to 18 months. 
The Central Bank left the interest rates unchanged at its September monetary policy meeting. 
On a Month-on-Month (MoM) basis, the food inflation declined by 0.7 percent as the vegetable prices saw a sharp decline. 
However, the fruit prices have shown a marked increase during the recent months, which also was reflected in the price movements in September. 
Nevertheless on a Year-on-Year (YoY) basis, the food inflation edged down to 5.5 percent from 5.6 percent in August. 
Meanwhile, non food inflation increased by 0.2 percent on a MoM basis while on a YoY basis the non-food prices increased by 2.5 percent from 2.4 percent in August. 
There is a general tendency for the non-food inflation to rise when the economy migrates into a higher middle income territory as the people tend to increase their spending on travelling, leisure and re-creational activities. 

Prices of private transport could further rise if the government decides to increase fuel prices in response to OPEC’s tentative agreement to cut production among members last week. 
The Value Added Tax amendment Bill is also likely to receive the Parliament nod tomorrow that could push prices up, including telecommunication and healthcare sectors. 

It is expected the forthcoming budget could slap more direct taxes on individuals and corporates to bring in a better balance between indirect and direct taxes.