The headline inflation measured by the Colombo Consumer Price Index (CCPI) for the month of February 2015 dropped to a 11-year low of 0.6 percent from a year ago, declining from 3.2 percent recorded in January.

 

“The downward revision in fuel prices effected during January 2015 and the reduction of price/import duty of both food and non-food items as proposed in the interim budget 2015 contributed heavily towards this monthly decline in the index,” Central Bank said in a statement.The CCPI value decreased 4.3 index points or 2.35 percent in February from January to 178.9 representing a decrease in the expenditure value of Rs. 1,201. 96 in the market basket.

The interim budget 2015 slashed taxes of 13 food items and reduced administered prices of utilities such as gas, kerosene and bus fares. But questions remain if the benefit of certain price reductions are fully passed on to the end consumer.

Economists have warned of a possible ‘lowflation trap’ in Sri Lanka, similar to the malaise currently being experienced by European Union countries where the inflation is declining sharply and remaining at low levels but the lending rates failing to keep pace, leading to higher real interest rates providing no incentive for the borrower to demand bank credit.The Department of Census and Statistics will change the basket of goods and their weights of the CCPI from this year based on the household income and expenditure survey – 2012/13 to better reflect the changing consumer patterns of the Lankans.

The impact of the Rs.5,000 salary increase to the public servants (sans productivity improvements) on inflation remains to be seen and the country is nearing the festive season which will fuel the import bill toward the end of March and early part of April.

At a time when the Sri Lankan rupee has come under increased pressure due to foreign debt repayments and foreigners exiting the government securities market due to low yields, the seasonally higher import bill, which is yet to tick in, will put an additional pressure on the rupee resulting in expensive imports.
Meanwhile, core i nflation which measures t he underlying inflation of the economy removing the products which have had the largest price changes (high volatility), declined to 0.8 percent from 2.1 percent in January 2015.

The annual average inflation increased by 0.6 percent in February, much slower than 3.2 percent in January 2015.On a month-on-month basis prices in the food subgroup has declined by 0.99 percent while non-food category prices declined by 1.35 percent contributing to the aggregate decline of 2.35 percent in the CCPI in February.All items in the non-food category with the exception of clothing and footwear saw declines in prices.