Annual Average Inflation reaches lowest level

The annual average inflation rate, as measured by the Colombo Consumers’ Price Index (CCPI) (2002=100), computed by the Department of Census and Statistics, decelerated steadily to 3.4 per cent in 2009 from 22.6 per cent recorded in 2008. This is the lowest annual average (end year) inflation rate recorded since 1985. The point-to-point inflation reached 4.8 per cent in December, 2009 compared to 14.4 per cent recorded in December last year.
Maintaining a low inflation rate generates numerous economic and social benefits. It encourages savings and investment, stimulates capital flows from non-productive investment to productive investment, thereby promoting economic growth and generating employment opportunities. Moreover, low inflation prevents the formation of adverse expectations, and the resulting stability supports investors, consumers, planners and policy makers to make effective decisions. Low inflation also protects most vulnerable groups, such as fixed income earners, pensioners and low income groups as high inflation would erode their real income rapidly.

Price Movements in 2009

The contribution to the annual average change of 3.4 per cent in the Index arose mainly from sub category of Food and non-alcoholic beverages (2.8 per cent). It was followed by the sub categories of Health, Recreation and culture, Education, Furnishing, household equipment and routine household maintenance, and Clothing and footwear. However, contribution of Transport sub category to the annual average increase was negative in 2009, mainly due to the downward revisions in fuel prices and public transport charges.
The steady deceleration in the annual average inflation rate was a result of favourable developments in both the demand and supply side factors. On the demand side, the tight monetary policy pursued by the Central Bank in 2007 and 2008 effectively checked rising inflation. On the supply side, favourable domestic supply conditions, mainly from the North and East and the decline in international commodity prices lowered the price pressure.
Despite recent pressure on prices, the average price of rice remained relatively low compared to the previous year, mainly owing to the price ceiling imposed by the government. However, the paddy prices recorded increases towards the latter part of the year, due to supply shortages resulting from the bad weather conditions and farmers limiting the release of their stocks due to uncertainties that prevailed about the Maha harvest.

Vegetable prices

The prices of vegetables were relatively lower compared to the previous year, though increases were reported in certain months of the year. The average price of coconut and coconut oil decreased by 22.2 per cent and 24.0 per cent, respectively in 2009 compared to 2008 owing to the increased coconut production. However, the domestic price of potato, on average, increased by 19.5 per cent in 2009 compared to the previous year, mainly due to the decrease in supply resulting from the unfavourable weather conditions that prevailed in potato growing areas.
However, the average prices of fish and sea food increased marginally by around 6 per cent during 2009 as a result of the substantial increase in these prices in the mid year, due to the lower supply conditions. Nevertheless, in line with the commencement of the fishing season in July and relaxation of limitations for fishing in the North and East coastal areas since end June 2009, the fish production increased and the prices of fish began to drop noticeably.

Housing, water, electricity, gas

There was only a marginal increase in the Housing, water, electricity, gas and other fuel sub index by around 0.3 per cent in 2009 compared to the last year. It was a combined impact of the downward revisions of fuel and gas prices and the increase in water tariff effective from February 15, 2009, and the increase in Nation Building Tax from 1 per cent to 3 per cent effective from early May, 2009.
In the international front, the decline in fuel prices had a direct and an indirect complementary impact on domestic prices. The fuel price reductions effective from end December 2008 contributed substantially, both directly and indirectly, on the overall cost structure of most of the consumer and intermediate goods. Subsequently, it contributed to lower the price level. However, the upward adjustment of fuel prices of petrol, diesel and kerosene by Rs. 10/-, Rs. 3/- and Rs. 1/- per litre, respectively, with effect from July 2009 in line with increased import price of crude oil from US dollars 41.71 per barrel in January to US dollars 72.8 per barrel in June 2009, had a slight upward pressure on the prices during the rest of the year. The LP gas prices were revised on 4 occasions in 2009. These price revisions since end year 2008 had a favourable impact on the Index.

Price behaviour

Deceleration in inflation was also attributable to the price behaviour of the items in the import category in the CCPI basket. The contribution of imported items to inflation, on average, declined from 38.9 per cent to negative 10.0 per cent, while the contribution of domestic items increased from 61.1 per cent to 110.0 per cent, between 2008 and 2009. The decrease in freight charges and lower commodity prices in the international market due to the global recession led prices of key imported items to decline during the year. Accordingly, the average domestic prices of wheat flour, milk powder and vegetable oil also decreased, compared to the last year.
The impact of low international prices of imported items on consumer prices was further facilitated by the stable exchange rate. The Sri Lankan rupee depreciated only marginally by about 1 per cent against the US dollar in 2009.
The annual average core inflation, which is derived by excluding food and energy items from the CCPI basket, too declined to 9.2 per cent in 2009 from 13.6 per cent in 2008. The point-to-point core inflation also followed a declining trend reaching 5.9 per cent at the end of 2009 compared to 15.7 per cent at end of 2008.