Producer prices accelerate to near double digits in August

Sri Lanka’s producer prices, which measure the inflation facing the producers before such produce reaching the consumer, accelerated in August across all major economic activities from a month ago, while the overall index inched closer to double-digit levels from the year earlier levels. 

According to the Producer Price Index (PPI) released by the Census and Statistics Department, typically with a 45-day lag, such prices have risen by 0.3 percent in August from a month ago, reversing a 2.2 percent contraction seen in July, while the producers are paying 9.4 percent higher prices from a year ago levels. 

The PPI is measured for three key economic activities – agriculture, manufacturing and electricity and water supply and provides a forerunner for the higher consumer prices, as the higher shelf prices come with part of the pass through effects by the producers, although not entirely could be passed down to the end consumer. 

According to the widely used consumer price gauge, Sri Lanka’s consumer prices rose by 5.7 percent in the year to September, slowing from 6.0 percent in August but the monthly prices accelerated to 0.4 percent, from 0.3 percent in August. 

The Central Bank expects the near-term headline inflation could run higher than its desired band set at 6.0 percent, after the most recent upward price revisions go into effect.

Under the PPI, although the agricultural produce saw the annual prices declining by 0.8 percent in August, 

marking the third consecutive monthly decline since June, the prices rose by 0.1 percent in August from July, reversing from a 4.7 percent contraction between June and July. 

It is yet to be seen how the chemical fertiliser and agro-chemical ban would play out in the prices in the agricultural produce in the next couple of months as several studies have shown crop declines up to 30 percent, although the government has assured of making the organic fertiliser available in abundance in earnest. 

Meanwhile, under manufacturing, although the yearly prices eased to a 10.5 percent increase in August, from 11.0 percent in July, the monthly prices increased by 0.3 percent, from a contraction of 1.1 percent in July, perhaps reflecting the higher raw material prices caused by the global commodities prices boom and the weaker rupee prevailed mostly during August.  August was the month in which Sri Lanka’s foreign exchange situation catapulted into crisis proportions, creating shortages and rationing of foreign currency, prompting banks to quote much higher rates than the official rates for importers, due to the unavailability of conversion by the Central Bank.  Since then the Central Bank directly intervened in the markets by supplying foreign exchange, rebuilt confidence and restored stability through an envisaged pipeline of inflows into the domestic foreign exchange market in the next six months until the expected rebound in tourism and investment flows next year.  Meanwhile, the prices under the category electricity and water supply increased year-on-year and month-on-month by 1.8 percent and 2.0 percent, respectively, pushing up the prices of both agricultural and manufacturing activities.