ICRA cites several reasons to believe why inflation could be higher during 2H

• Says global commodity price increase, imported goods shortage, weaker rupee to contribute to price elevation 
• Cites boost in consumer spending following faster vaccination drive too to retain higher prices for rest of year

ICRA Lanka has several reasons to believe why the cost and consumer inflation could be higher in the second half of the year, relative to the first half, as all signs point to that direction with the raging virus spread, putting a damper on the broader economy whenever it attempts to stage a comeback. 

During the first six months, Sri Lanka saw some eye-popping inflation, a major part of that was caused by the supply chain-crushing restrictions that stayed during the second quarter, claiming to stem the virus spread. 
But ICRA Lanka Limited in a fresh report cited several reasons why the people should brace for higher prices in the ensuing months. 

The rating agency cited the rising global commodities prices, possible shortage of imported goods caused by the tightened import controls, weaker rupee, which makes the imported goods even more expensive and the potential supply shocks on agricultural produce from an ungodly weather which no one has control over, as possible reasons to keep both supplier and consumer prices elevated.

Sri Lankans are already contending with over 10 percent higher prices for their food staples over the same period last year and are unlikely to be able to accept anymore higher prices, particularly at a time when the incomes of many have been hurt, due to the dampened market conditions created by COVID. 

Colombo inflation, the widely used consumer price gauge, rose by 5.7 percent during the 12 months to July 2021, accelerating from 5.2 percent in June and continuing the uptrend that began in May, about the same time when the lockdowns went into effect. 

People in July spent 11.0 percent higher on their food staples from a year ago, not much different from the 11.3 percent high prices in June. 

ICRA Lanka cited another reason why the prices could remain higher during the remainder of the year, i.e. boost in the consumer spending, which could occur with the faster vaccination drive. 

The increase in prices, due to recovery in consumer spending, is not entirely bad as long as the rise in incomes can beat the rise in prices, which will enhance people’s economic well-being. 

Slightly higher inflation is sometimes a by-product when an economy changes gears to an acceleration mode in the interim but the prices should soon settle at a more benign level in the medium term when the economy finds its equilibrium.  

Further, there is also an element of global inflation caused by the strain on supply chains, which caused by a combination of factors from the pent-up demand, record stimulus and faster vaccination drive, which made possible for the economies to reopen globally from months-long restrictions. 

Hence, the current spurt of inflation felt by the rise in global commodities prices could gradually dissipate when demand conditions neutralise with the ending of stimulus unleashed by the global central banks as happens in many countries. 

Further, ICRA Lanka’s inflation forecast under its higher inflation scenario also hovers between the 5.0-6.0 percent range during the 2H21, which is skewed toward the upper band of the Central Bank’s desired inflation range of 4.0 to 6.0 percent. 

The higher prices caused by the import controls and weaker rupee entirely depend on the trajectory of the pandemic and how quickly the country can restore its dollar incomes and other inflows, which ran dry due to the pandemic-induced economic malaise.