Colombo inflation slows to 4% in August on decline in food prices, high base effects

• Sharp decline in inflation however offers little evidence of improving living standards of people as real incomes stay stagnant 

Inflation in Colombo has continued its decline through August compared to the previous year, providing much-needed relief to both individuals and businesses. However, the persistent high cost of living is still straining household budgets, as incomes have not kept pace.

Consumer prices measured based on the Colombo Consumer Price Index, the officials’ most preferred gauge of price movements, decelerated to 4.0 percent in the twelve months to August 2023, touching the low end of the Central Bank’s desired inflation band of 4-6 percent. 

The consumer prices rose by 6.3 percent in July from the same month a year ago. 
This is a sharp decline in the pace of price increases from the peak of 70 percent reached in September last year, and the Central Bank could now take a victory lap for bringing down the ugliest inflation spiral the country has ever seen in the shortest span of time. 

The so-called core prices, which strip out the often-volatile items such as food, energy and transport, too eased to 4.6 percent in August from a year ago, compared to 5.9 percent through July. 
With price stability in the economy been achieved, the Central Bank has shifted its focus toward revitalising an economy that had been impacted by elevated interest rates introduced by the bank itself the previous year, as a measure to control inflation.

Although the bank slashed key rates twice last three months, re-opening of credit flows in to the real economy remains subdued.

Central Bank last week took some targeted measures to force banks to cut lending rates to ensure credit flowing into the real economy, so that  businesses would borrow to ramp up their production and bring back the jobs lost during the last three years.

 Meanwhile, monthly prices also continued their decline for the second month in a row as prices came down by 0.1 percent in August after falling by 1.1 percent in July. 

Monthly movement in prices offers a clear idea of the direction of true sticker prices of products as annual prices are affected by the higher base effects of last year. 

Number of food items in fact came down in prices during August, flipping the annual food price index into 4.8 percent deflation, compared to the 1.4 percent decline through July. 
Monthly food prices too fell by 1.3 percent from the July levels offering some hope that people could gradually return to their pre-crisis level consumption habits. 

Meanwhile, non-food prices too decelerated to 8.7 percent in the twelve months to August from 10.5 percent a month ago as electricity tariffs were revised downwards while the prices at restaurants and hotels which have persistently been high, relented at last.   

The monthly prices however edged up 0.6 percent from a decline of 1.7 percent in July due to increase in water tariffs and the price of petrol under the pricing formula.