Producer prices continue to decline, alleviating concerns about future inflationary pressures

Producer prices, which typically gauge price pressures through supply chains before reaching end consumers, have continued their months-long deflationary trend through October. This eases concerns that prices could reaccelerate in the near term.

Measured by Producer Price Index (PPI) by the Census and Statistics Department, the changes in producer prices for October came in at a negative 7.6 percent from a year ago, extending the record of negative readings in the index that began in June this year.

While the monthly measurement showed a marginal increase of 0.1 percent in October over the previous month, this was driven by the utility sub-group, with the prices of electricity, gas, and water being revised higher as part of cost reflective pricing adopted last year by the government.

Although producer prices are not closely monitored like consumer prices in Sri Lanka, they serve as an essential economic barometer, providing insights into the potential direction of future prices. However, due to its months-long lag in releasing the index, its significance for decision-making may have lessened compared to consumer price indices, which are closely followed in policy-making, planning, and forecasting.

Changes in producer prices may be more meaningfully reflected in consumer prices in the following month. For instance, the Colombo Consumer Price Index recorded a 3.4 percent increase in November from a 1.5 percent rise in October, measured annually.

At its peak, producer prices were rising by over 100 percent last year before gradually easing in the latter part of the year. This followed a spike in prices when the rupee was free-floated after the country ran out of foreign exchange to fund imports, causing widespread shortages in many commodities across supply chains.
The persistent deflation seen across supply chains could serve as a positive signal for keeping inflation expectations in the economy under control and at the Central Bank’s target levels in the medium term, in the absence of any exogenous shocks.

In the three major sub-sectors measured for producer price inflation, prices in the agricultural sector fell by 8.6 percent in October from a year ago, while manufacturing sector prices declined by 9.4 percent. 
However, the utility sub-sector, capturing price changes in electricity, gas, steam, air conditioning, and water supply, surged by 41.4 percent due to back-to-back upward revisions in their prices since last year.