Producer prices retreat as supply chains get unclogged

The producer prices retreated for the third consecutive month in January, reflecting the easing prices in the supply chains across various sectors, as Sri Lanka is on a disinflationary track after the peak prices in the third quarter last year. 

The Producer Price Index (PPI), measured by the Census and Statistics Department, showed the prices rising by 83.1 percent in the 12 months to January 2023, slightly easing from 89.0 percent through December 2022. 
The producer prices measure the level of inflation through the supply chain before the products reach the end consumer. 

Generally there is about a month-long lag between the producer prices and consumer prices.
The producer prices measured on a monthly basis however edged up by 0.4 percent in January, from a 0.2 percent increase in December, reflecting how stickier some prices in the supply chain are. 

However, not all price pressures faced by the suppliers are passed onto the end consumer, as the consumer prices are going at much lower levels than the producer prices. 

This reflects a margin squeeze for the producers and other participants in the supply chain. 
The December quarter earnings season, which ended recently, showed how much the operating margins the businesses had been crimped. 

The PPI for January showed that the agriculture sector prices had risen by 49.7 percent annually and by 2.9 percent monthly. 

The manufacturing activities saw their prices rising by 89.4 percent measured annually but the monthly prices remained unchanged from the December levels. 

Meanwhile, the utility collective, which include the electricity, gas, steam and air conditioning and water supply prices, rose by 69.8 percent while the monthly prices edged up 0.7 percent. 

Sri Lanka’s consumer and producer prices turned a corner in September and November, respectively, as the country entered a disinflationary path. As Sri Lanka is seeing its foreign currency situation easing and supply chains getting unclogged gradually after months-long shortages and bottlenecks, a faster deceleration in prices across the goods and services supply chains could be expected.

Sri Lanka is expected to remove any remaining restrictions on imports shortly, further easing the supply conditions and thereby the prices.