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Sri Lanka index shows ‘deflation’ as prices rise for fourth straight month

ECONOMYNEXT – Sri Lanka’s 12-month inflation turned a negative 0.2 percent in July 2015, though prices rose four the fourth straight month, data from the state statistics office showed, amid a consumer boom fired by state spending and credit.

The Colombo Consumer Price Index also rose 0.2 percent in April, 0.7 percent in May and 1.0 percent in June, following sharp 2.3 percent fall in February after the state cut prices of fuel and some imported foods.

The current low inflation also comes on the back of falling commodity prices amid a strengthening US dollar, which had allowed some prices like fuel to be cut.

When disposable incomes rise by such falling prices, the extra spending power can boost the demand for non-oil goods, pushing up their prices. When oil prices rise the opposite happens if retail prices are market based.

However some of the price cuts were financed by credit and over the past few months billions of rupees of excess liquidity has been released the market by the Central Bank setting off an import boom.

Imports have boomed amid the liquidity releases and credit and the currency peg had been maintained with interventions. In April the Central Bank also cut rates.

Having exhausted excess liquidity, during the last two months the Central Bank had also acquired 66 billion rupees of Treasury bills to its books, effectively monetizing debt, raising concerns among some inflation watchers.

Over the past four months, the price index had grown 2.58 percent, though the annual change is a negative 0.2 percent.

Since 2004 Sri Lanka has re-based the index several times making it difficult to keep track of a similar basket, but consumer prices had been low in 2009 following the collapse of the global credit bubble and also in 2004, when Sri Lanka had prudent monetary and fiscal policy.

The Colombo Consumer Price Index showed inflation of 0.5 percent in the 12-months to January 2004, and the country-wide Sri Lanka Consumer Price Index – which was later scrapped as prices rose sharply amid money printing – fell to -0.9 percent. (Colombo/July30/2015).





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