Inflation increased in the beginning of the year, mainly due to the rise in prices of several varieties of food items, primarily owing to supply disruptions caused by the adverse weather conditions that prevailed in major producing areas, stated the Central Bank.
The annual average inflation, as measured by the Colombo Consumers’ Price Index (CCPI) increased to 6.1 per cent in February from 6.0 per cent in January 2011, while the inflation increased to 7.8 per cent as anticipated, the Bank further said.
However, with the increased supply of vegetables and other crops in the market since the last week of February, a gradual reduction of prices, particularly, most varieties of vegetables, rice, fish and sea food, big onion, red onion, potato, coconut and coconut oil etc. has been observed. As a result, the Index is expected to decrease in March 2011 compared to that in February 2011.
However, inflation on is likely to increase to around 8 per cent in March 2011, due to the low base in March 2010. Meanwhile, a marginal increase in the annual average inflation is also estimated. The upward trend is expected to continue in April 2011 as well, mainly due to the festive demand and the base impact.
Nevertheless, with stocks being released to the market and the expected increase in the extent of cultivation during the Yala season, prices are expected to remain low during the latter period of the year. Accordingly, year-on-year inflation is expected to decelerate from May 2011 onwards to reach 6.0-7.0 per cent by the year end, although annual average inflation may follow an increasing trend during the balance period of the year to record around 7 per cent by December 2011.
The performance in the key sectors of the economy has raised the prospects for high economic growth in 2011, which would contribute positively towards containing inflation. However, unpredictable weather conditions could impact negatively causing temporary price increases.
The continuous increase in the prices of key international commodities especially that of crude oil could also cause a one-off increase in inflation if it is passed through to domestic consumers. Even if such price increases are not passed on to the domestic consumers, the contribution of imported items to the annual average inflation would increase from around 20 per cent in February to around 24 per cent in December.
Under this scenario, the contribution of imported items to year-on-year inflation would decline over time.