Consumer prices ease to two-year low in January amid pandemic

• Both food and non-food prices record declines
• Core inflation falls to 2.7% from 3.5% in Dec.

Consumer prices measured by the Colombo Consumer Price Index (CCPI) fell sharply in January as food and non-food prices eased with little pressure coming from supply side amid dampening impact on demand in certain sectors due to the pandemic. 

According to the latest price data by the Department of Census and Statistics, Colombo district inflation rose to 3.0 percent in the twelve months to January 2021, decelerating from 4.2 percent in December 2020. 

The January headline inflation is also the lowest since December 2018 when the CCPI measured inflation dropped to 2.8 percent when the economy was battered by the tight fiscal and monetary policies, which were also exacerbated by a protracted political turmoil. 

Meanwhile, the so-called core prices measured barring the often-volatile items such as food and energy, also fell to 2.7 percent year-on-year (YoY) in January 2021 from 3.5 percent in December 2020. 

The inflation appears to remain well anchored at present within the 4 to 6 percent desired range in the medium term.  

Some economists predict inflation to pick up by mid part of this year with acceleration in private sector credit and aggregate demand in the economy. 

The Central Bank has been following what is referred to as ‘Modern Monetary Theory’, where deficit finance happens through printed money at record low interest rates, until the country closes its output gap between the potential and the actual. 

January inflation also comes at a time when the country is collecting its third back-to-back record paddy harvest and in the midst of a great production reawakening seen in more than half a century.

However, the weather gods could upset the party, which could create some supply constraints and push prices upwards. 

Meanwhile, according to the CCPI report for January, food inflation decelerated to 6.8 percent from 9.2 percent in December on YoY basis while on a month-on-month (MoM) basis too such prices decelerated to 0.9 percent from 1.4 percent in December. 

The non-food prices, which have long remained muted, slowed to 1.4 percent YoY from 2.0 percent in December while the MoM prices remained flat at 0.3 percent.