Mid-single digit level inflation achieved in 2010 – Central Bank

Central Bank said on Friday that the annual average rate of inflation, as measured by the Colombo Consumers’ Price Index (CCPI) (2002=100), computed by the Department of Census and Statistics, was 5.9% in 2010. 

It is noteworthy that this is the second lowest annual average (end year) inflation rate observed since 1999. The year-on-year inflation stood at 6.9% in December 2010.

Favourable domestic supply conditions due to improvements in the agriculture sector as well as increase in supply of food commodities, mainly from the North and East helped contain   price pressure to a certain extent, although seasonal increases of prices of some commodities were experienced during some months of the year. In the international market, commodity prices increased with the recovery in the global economy.  However, the impact of these price changes on the domestic inflation was arrested by import duty revisions. Further, the unchanged prices for petrol and diesel during the year helped contain inflation. Prudent monetary policy also supported preventing   inflation from rising.  

Price movements in 2010

The contribution to the annual average change of 5.9% in the index arose mainly from sub category of Food and non-alcoholic beverages which increased by 6.8%.   All other sub categories of clothing and footwear; housing, water, electricity, gas and other fuels; furnishing, household equipment and routine household maintenance; health; transport; communication; recreation and culture; education; and miscellaneous goods and services also caused upward pressure on the index. However, pressure from transport sub category was very marginal in 2010, since prices of petrol and diesel and public transport charges remained unchanged during the entire year.  

Paddy production in 2010   improved when compared to that of the previous year and the   average price of rice recorded a drop in 2010 compared to 2009. To check the rising rice prices during the closing months of the year, the government re-imposed the price ceiling w.e.f. 10.12.2010 which was removed w.e.f. 26.10.2010, and started releasing paddy stocks to millers and distributing rice through Co-operatives and Sathosa outlets at a lower price.

The prices of vegetables were generally higher compared to the previous year, though seasonal decreases were reported during the course of the year.

 The average price of coconut and coconut oil increased sharply by 28.9% and 24.0%, respectively in 2010 compared to 2009, owing to the sharp drop in coconut production and this contributed substantially to inflation.

The average prices of fish and sea food increased by around 10.2% in spite of the improved fish production during 2010. Adverse weather conditions contributed to price increases during the middle of the year. However, fish prices decreased towards end of 2010.

There was an increase of around 3.4%  in the housing, water, electricity, gas and other fuel sub index, recorded in 2010 compared to the last year. This was mainly due to the net impact of revision of LP gas prices affected during the period.

Although the import prices of crude oil increased by over 25% during the year compared to 2009, domestic prices were not adjusted. Stable fuel prices had a favourable direct and indirect impact on domestic prices.  

Unlike in 2009, prices in the import category in the CCPI basket contributed to inflationary pressure in 2010.   Import duties were adjusted on imported items from time to time to reduce the impact of high import prices on domestic inflation.

The contribution of imported items to annual average inflation, increased from negative 10.0% in 2009 to 14.8% in 2010, while the contribution of domestic items decreased from 110.0% in 2009 to 85.2% in 2010.

 Accordingly, the average domestic prices of wheat flour and milk powder decreased while the price of sugar increased, compared to 2009.  The impact of high import prices on consumer prices was somewhat mitigated by the slight appreciation in the exchange rate.  The Sri Lankan rupee appreciated by about 1.7% against the US dollar on average in 2010.  

The annual average core inflation, which is derived by excluding food and energy items from the CCPI basket, declined to 6.3% in 2010 from 9.2% in 2009. The year-on-year core inflation also followed a declining trend reaching 5.6% at the end of 2010 compared to 5.9% at the end of 2009.