Annual inflation slows to 7 month low in August

(Reuters): Sri Lanka’s annual inflation rate eased to 7.0 percent in August, a seven-month low and below forecasts, due to slowing global prices of commodities such as oil and expanding vegetable supply, officials said on Tuesday.

Inflation moderated from 7.5 percent in July, according to a new consumer price index introduced in June, and was below forecasts it would stay at 7.5 percent, government data showed.

“It’s because of moderating prices, especially global commodity prices like oil, coming down,” said Samantha Amerasinghe, an economist at Standard Chartered Bank in Colombo.

Vegetable prices dipped 0.34 percent in August from July. Vegetable supply has improved after being affected by flooding in January and February, which the government estimated caused at least $500 m in damage.  Average annual inflation, measured by a 12-month moving average, accelerated to 7.1 percent this month, its highest since the new index was launched, from 7.0 percent in July.  A Reuters poll had forecast the annual average would hit 7.2 percent.

Core annual inflation, which excludes fresh foods, energy, transport, rice and coconut prices, eased to 7.8 percent from a seven-month high of 8.9 percent a month ago.

The Central Bank has said it has little concern over inflation as it is under control, and it expects to be able to reduce policy rates longer term.  The Central Bank held interest rates steady at six-year lows at a meeting on 19 August, but warned it would take appropriate action if demand-driven inflation pressure increased.

            

Private sector credit growth hit a 16-year high of 34.4 percent in June year-on-year. However, the Central Bank says credit growth is not yet creating demand-driven inflationary pressure as the island nation’s $50 b economy has the capacity to expand, given that it is still emerging from the end of a 25-year war in May 2009.