Producers continue to struggle with high single-digit price increases

• May PPI up 8.7%; but slight deceleration from 9.8% in April

Local manufacturers across wider segments are confronted with the incessant high prices hovering near double digits as lockdowns added to their woes by way of crippling their supply chains and higher import costs amid import controls and weaker rupee, although the demand conditions remained dampened through most of May. 

Producer prices measured by the Producer’s Price Index (PPI) rose by 8.7 percent in May 2021 from a year earlier period, as prices of all economic activities from agriculture to manufacturing to electricity and water supply, rose with the highest reported in the industrial sector. 

However, May increase was a slight deceleration of prices from the 9.8 percent increase recorded in April. 

The PPI, which gauges producer inflation, though being a lagging indicator compared to consumer inflation, provides the underlying reason for the spiralling prices at consumer level as manufacturers tend to pass full or part of the higher costs they confront to the end consumer. 

What could further add up to their already higher prices from the following month in June is the higher fuel prices, which reverberate through their supply chains.

Sri Lanka is now facing over 11 percent higher prices in the food basket from a year ago as seen from the Colombo Consumer Price Index for June, which could be understood by looking at how fast the prices have risen at majority of sub-activities of the agricultural sector. 

For instance, the price of animal farming, which broadly represents sub-activities such as eggs and the production of dairy, rose by 14.3 percent. Taken separately, price of eggs production rose by 16.0 percent and production of dairy by 12.0 percent.

The government last September announced a host of measures to strengthen and boost the capacity of small scale dairy farmers who account for 85 percent of local liquid milk production, but since then the price of a litre of liquid milk has risen by nearly 30 percent, including of the State-owned daily producers.

Meanwhile, the prices of growing  vegetables rose by as much as 20.2 percent, and the prices of growing of cereal and other crops rose by 20.4 percent, reflecting what caused the people to spend heavily on their essentials. 

The only segment under agriculture, which recorded some easing in prices in May was the growing of fruits, nuts and beverages and spice crops, which declined in prices by 2.4 percent from the same month in 2020. 

Meanwhile under manufacturing, the producer prices of leading sectors such manufacturing of textiles and manufacturing of wearing apparel, dressing, and dyeing of fur rose by 13.3 percent and 8.6 percent as prices across its supply chain rose substantially including fabric, particularly raw material. 

The Central Bank however is of the view that the current bout of inflation is transitory and said they wouldn’t hesitate to tweak the current policies should the data signal sustained higher prices.