National consumer prices fall sharply in May to 22.1% on base effects

• Fast cooling prices could galvanise rate cuts by Central Bank in coming months 

Sri Lanka’s country-wide consumer prices, measured by the National Consumer Price Index (NCPI), fell sharply to 22.1 percent in the 12 months to May 2023, easing from 33.6 percent in the period through April, the data released by the Census and Statistics Department showed. 

The prices measured on a monthly basis, which provides a better idea over the near-term price pressures, however inched up 0.2 percent in May over the previous month, from a decline of 1.0 percent between March and April, reflecting that the country is yet to exit the ugly inflation spiral. 

Sri Lanka’s nationally measured inflation peaked at 73.7 percent in last September and then started easing, at a quicker pace in the last couple of months, particularly, predominantly due to higher statistical base effects. 

The recent strengthening of the rupee against the dollar so far has had limited impact on bringing down the sticker prices of many goods and services in the domestic market, due to the lagged effect of this positive development filtering through local supply chains. 

The national core inflation, which reflects the underlying price pressures in the economy, rose by 21.6 percent in the 12 months to May, coming down from 31.8 percent in April.

Core prices measure the rate of inflation barring the often volatile items such as food, energy and transport.  In developed economies like the United States, they now measure super-core inflation, a narrower price gauge that excludes goods inflation to focus on services inflation. Services are the main driver of high inflation in these economies.
Meanwhile, the food prices measured nationally rose by 15.8 percent in the year through May 2023, cooling from 27.1 percent but the monthly prices edged up by 1.0 percent, from an increase of 0.3 percent in April.  This is because the prices of vegetables, fresh fish, sugar and chicken prices, which escalated, outstripped the declines in the prices of other commodities such as milk powder, fresh fruits, rice and the likes. 

The non-food prices in Sri Lanka fell sharply in May to 27.6 percent, from 39 percent in April, thanks to sharp back-to-back downward revisions in energy prices.  The monthly prices followed suit and even by 0.4 percent, adding to the 2.0 percent decline in April.  Sri Lanka’s prices are widely expected to touch single digits as early as in July-August, before reaching the desired range of 4-6 percent by the end of this year. But if that would deliver the expected economic wellbeing for the people remains a huge question, as much of the deceleration in inflation is due to higher base effects, last year. 

One positive could be that interest rates could follow the path of inflation, triggering people and businesses to restart borrowing, resulting in the expansion of the GDP. But such gains would be limited, if the external sector continues to remain fragile.