Producer prices surge to 11% in September

• Marks highest jump in prices since April this year 
• Monthly price increases accelerate to 1.2%, from 0.3% a month ago 
• Majority sectors under manufacturing saw their prices rising by double-digits  
• Perennial and non-perennial crop prices up at 8.0%; food production cost rises 3.4%      

Sri Lanka’s producer prices jumped to the highest level in five months in September, as the manufacturers across broader industries had to contend with myriad issues stemming from the global commodities prices boom, worsened by the supply chain crunch, foreign exchange crisis at home and fresh restrictions on mobility and some economic activities. 

The Producer Price Index (PPI) rose by 11 percent in the 12 months to September, the highest since April this year. The producer prices rose by 9.4 percent in August from a 
year ago. 

The price changes measured on a monthly basis jumped 1.2 percent in September, accelerating from 0.3 percent in August, as prices across agriculture, manufacturing and other utilities rose from the levels 
seen in August. 

The producer prices measure the inflation before it hits the end consumer, as producers tend to fully or partly pass down the rising prices to their customers. 

The key consumer price gauge in Sri Lanka rose by a four-year high to 7.6 percent in the 12 months to October, accelerating from 5.7 percent in September. Producer prices are a leading indicator of the consumer prices and the impact of September producer produces should reflect in the October consumer prices. 

While there is a general price increase from energy to metal to food to almost every other commodity in the world, due to higher spending by the consumers who are coming off from the pandemic-induced restrictions amid the supply chain snarls and disruptions caused by the virus-related factory closures in key producing regions such as Asia, the persistent foreign exchange shortage at home has worsened the conditions facing the local producers. 
The prices under agricultural production rose by 0.9 percent between August and September but declined by 2.2 percent from a year ago period. While the monthly prices were driven up by the perennial crop growing, the annual prices facing growers of both perennial and non-perennial crops saw their prices rising by 8.0 percent and 8.1 
percent, respectively. 

However, the cost of animal production fell by 1.5 percent from a year ago. 

Meanwhile, the broader manufacturing sector confronted with the highest increase in prices, both at monthly and annual levels, which climbed 1.3 percent and 13.8 percent, respectively. 

Many sub-sectors under manufacturing experienced double-digit growth in prices with manufacturing of textiles and wearing apparels, which had a larger composition of the manufacturing sector, saw their annual prices rising by 18.4 and 12.3 percent, respectively from a year ago. 

The food and beverage production, which also accounts for bigger components of the entire manufacturing sector, saw their prices rising by 3.4 percent and 1.9 percent, respectively, although their prices either eased or remained static from a month ago. 

These conditions are mirrored in almost all companies, which reported their earnings for the September quarter, which saw their costs rising sharply.  Meanwhile, the collective cost of electricity, gas, steam, air conditioning and water collection, which together used as ‘utilities’ in gauging the producer prices alongside agriculture and manufacturing, saw their monthly prices rising of 0.2 percent while the annual prices rose 0.6 percent.  The prices under this category could again see a steeper increase in October, with a cascading effect on the rest of the sectors, as the gas prices were revised up for the second time since August, to partly reflect the global market prices. 

Further, it remains to be seen how the proposed 2.5 percent Social Security Contribution would add on to the already higher prices, as tax experts and businesses warn that it could have a pass down effect through the supply chain, pushing the shelf prices further up. 

The government is facing a conundrum between raising revenues to bridge a widening budget gap while not imposing any more tax burden on the people, given the massive hardships faced by the people, due to the soaring prices and commodities shortages.

Much of the inflationary pressures, which are stemming from supply-side constraints, are expected to ease in the next couple months, as global retailers and manufacturers last week said the worst of the supply chain issues are behind them.  However, economists and analysts are calling the central banks to tighten monetary policy sooner and faster than they would want to do so to arrest the rising prices.