Producer prices accelerate signalling persistent troubles for manufacturers 

Producer prices, the nearest proxy for inflation at producer level, continued to accelerate in November stoking concerns of how much of this could get passed down to the end consumer and for how long, as the country’s prices are currently at their hottest levels in more than a decade. 

According to the Producer Price Index (PPI) which typically comes out with little over month’s lag, rose by 16.3 percent in the twelve months to November 2021, accelerating from 12.2 percent increase in October. 

Meanwhile, the prices measured on a monthly basis rose by 2.6 percent with the costs of agriculture rising the most in November from October as reflected from the massive increases seen in vegetable prices and over 22 percent increase in food inflation in December last year. 

Colombo consumer inflation rose by 9.9 percent in November and then12.1 percent in December reaching their highest levels in twelve years. 

Producer prices, which are also surging at record pace, get fed into consumer prices as producers tend to pass almost all cost increases on to the end consumer.  Rising consumer inflation is the byproduct of the policy mix used by central banks and governments around the world to blunt the effects of the pandemic. They sloshed markets with trillions of dollars which created a strong demand, and now they are scrambling to reverse those policies. 

In Sri Lanka too, major policy correction remains due from last year. But, the government did exactly the opposite of what is required as it announced a Rs.229 billion fiscal stimulus package for the most unproductive segments of the economy, such as public service and agriculture. 

Moody’s Investors Service on Monday said the relief package, although would help revitalise the demand and the growth in the economy, compounds the government’s fiscal challenges given the extremely limited fiscal headroom. And worse, the package is inflationary unless reallocations are made from elsewhere from the budget to pay for it.  According to the November PPI, manufacturing costs rose by 1.6 percent monthly while the annual prices jumped 17.4 percent.  Meanwhile, the other constituent of the PPI, electricity, gas, steam, air conditioning and water supply costs rose by 0.4 percent measured on a monthly basis although annual prices eased 0.6 percent in the year through November.