Higher inflation could be entrenched in Sri Lanka, says ICRA Lanka

The rising prices could further accelerate in the months to come to what appears to be an entrenched period of hotter consumer prices as commodities prices reached multi-year highs in the recent few weeks due to both the higher global commodities prices and the adjustment made to prices after the rupee float, according to a Colombo-based credit rating agency. Early into the Russian-Ukraine crisis, ICRA Lanka warned against higher commodities prices led by energy and this has now become a reality with oil and other commodities such as nickel, wheat, aluminium and the likes reaching multi-year highs in recent weeks. 

After nearing US$ 140 a barrel, the oil prices retreated last week to around US$ 100 a barrel after briefly touching below US$ 100 due to expectations of ceasefire talks between Russia and Ukraine and the hopes of easing demand conditions from China after it completely locked down Shenzhen, the Chinese tech hub. 
But the lockdowns were eased on Friday after the Chinese President Xi decided to soften the COVID impact on its economy as the Chinese economy is slowing down. 

The most recent outbreak came amid China exploring ways to exit their zero COVID policy. 
“Key commodity prices have reached multi-year highs fueling inflation globally. Sri Lanka is no exception; the double-digit inflation will accelerate further in the near-term continuing to inflict economic pain on masses for a foreseeable future,” ICRA Lanka said in its Monthly Economic Update. 

Sri Lanka’s consumer price index rose by 15.1 percent in the twelve months to February, reaching the highest in 13 years. While the monthly price movements showed signs of easing, the Russia-Ukraine conflict and the subsequent commodities price shock came from the rupee float from the March first week would keep prices much higher for the months to come.  Meanwhile, the coming festive season could also put further upward pressure on consumer prices as this is typically a period where the people spend on everything from food to clothing to other durables to celebrate the New Year. 

Sri Lanka is no exception to higher consumer prices as many economies including the United States, the United Kingdom, the European Union and emerging markets such as Argentina are battling their decade high prices. 
To fend off the build up of any more price pressure, the United States Federal Reserve last week fired its first salvo by raising its federal funds rate by a quarter percentage point, the first time since 2008, setting off a series of rate increases. 

Meanwhile, the Federal Open Market Committee has also decided to take up the timing of the balance sheet runoff of the US$ 9.0 trillion large assets from as early as their next meeting scheduled for May 6 to 7.