Transport gives Sri Lanka July inflation surprise rise

* Inflation surprisingly up in July despite improved supply

*Inflation under control; rise is not a concern, says CB

*Annual average inflation peaks; core inflation rises

COLOMBO (Reuters): Sri Lanka’s annual inflation surprisingly picked up in July from a year earlier as higher transport costs overwhelmed an improved domestic agricultural supply, putting pressure on the island nation’s accommodative monetary policy.

Annual inflation picked up to 7.5 per cent in July from a year earlier, up from 7.1 per cent in June, according to a new consumer price index introduced last month, Government data showed on Friday.

“This is  predominantly a cost-push inflation,” said Sanjitha Rajasekaran, Vice President at stock brokerage IIFL Ceylon, told Reuters. “It has mainly come from non-food items and transport has contributed a lot.”

Annual average inflation, measured by a 12-month moving average, accelerated to 7.0 per cent this month, its highest in the new index, from 6.7 per cent in June. Both inflation figures are higher than forecast by a Reuters poll  “This is mainly due to an increase in transport fares,” Central Bank Chief Economist K.D. Ranasinghe told Reuters. “We also expected inflation to decline. But if you see the food inflation, it has declined from improved supply.”

Several analysts and the International Monetary Fund (IMF), which is overseeing a $ 2.6 billion loan programme with the Government, have warned that the Central Bank’s low interest rate policy risks sparking inflation. However, demand-driven inflation has yet to raise its head significantly, despite robust credit growth.

Central Bank Governor Ajith Nivard Cabraal said the surprise bump was “not really” a cause for concern.  “Because we see the supply chain is getting quite stable and it wouldn’t really be uncomfortable for us,” he told Reuters. “This little bit of aberration doesn’t matter for us. Basically it is under control.”

Sri Lanka has forecast inflation to stabilise to around seven per cent by year’s end. The Government, with effect from 1 July, increased transport fares in line with annual revisions.  Core annual inflation, which excludes fresh food, energy, transport, rice, and coconut, rose to seven-month high of 8.9 per cent from 8.7 per cent a month ago.

The Department of Census and Statistics in June introduced the new index based on a 2006/2007 survey, replacing the earlier one that had a 2002 base year.