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Wednesday December 8th, 2021

Sri Lanka CB sees inflation rising in the near term, but rules out double digits

ECONOMYNEXT – Sri Lanka’s inflation will spike in the near future as the government removed the price controls, central bank officials said on while ruling out inflation hitting double digits.

With the cancellation of the price controls, the price of cooking gas, rice, cement, wheat flour, and milk powder have risen significantly, drawing public criticism against the government.

Chandranath Amarasekara, the director at the central bank’s economic research department said the global energy prices have risen sharply with crude prices rising 62.2 percent year-to-date, LP (cooking) gas by 74.4 percent, and coal by 202.3 percent.

In addition to this, he said prices of dairy, cereal, oil, sugar, and milk powder are also in a rising trend in 2021.

“We expect some near term inflationary pressure due to global price movement and surge in global commodity prices prompted the government to remove maximum retail price on several essential commodities,” Amarasekara told reporters on October 14.

“It is likely to cause headline inflation to deviate to somewhat from the target level of 4-6 percent in the near term. But we are not envisaging double digit levels of inflation.”

Sri Lanka’s food prices have rise in double digits though overall inflation is 5.7 percent under the widely used Colombo Consumer Price Index (CCPI) and 6.7 percent under National Consumer Price Index (NCPI).

The broader indices have a higher weighting in services and non-traded items which adjusts to central bank money printing and depreciation with a lag.

The state-owned oil retailer Ceylon Petroleum Corporation which increased the price by over 15 percent in June has been looking for another price hike to minimise the losses, local media have reported.

Global food, base metals and energy prices have risen as the US Fed fires a commodity bubble.

Sri Lanka’s central bank was set up in 1950 supposedly to carry out ‘independent’ monetary policy breaking a currency board (at the time to Sterling via the India rupee) but has instead amplified Fed inflation by depreciating the currency and is also firing domestic bubbles, critics say.

The central bank has claimed the inflation flowing through the de facto peg with the US dollar at 203 is a ‘supply shock’.

The central bank said there is a ‘bubble’ in vehicle prices, whose imports have been controlled. Rice prices are also generally above Pakistan and Indian prices amid import controls and a state agency has said it will import rice at a cheaper price.

Sri Lanka used car prices have bubbled up amid import controls and rupee depreciation. However used car prices have also bubble up in the US. When central banks practice prudent policy used car prices fall.

However Governor Ajith Nivard Cabraal said the country should see a slight dip in December inflation due to base effect – which means higher rise in the same month last year.

“We are keeping a close tab on the number to make sure it does not go into double digits,” Cabraal told reporters.

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