Inflation record low

*Improvements in agriculture sector

*Increase in food commodities supply

The annual average rate of inflation, as measured by the Colombo Consumers’ Price Index (CCPI) computed by the Census and Statistics Department was 5.9 percent in 2010. This is the second lowest annual average (end year) inflation rate observed since 1999, the Central Bank said.

The year-on-year inflation stood at 6.9 percent 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, the Central Bank said. 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. The unchanged prices for petrol and diesel during the year helped contain inflation.

Prudent monetary policy also supported preventing inflation from rising, it said.

The contribution to the annual average change of 5.9 percent in the index arose mainly from sub category of food and non-alcoholic beverages which increased by 6.8 percent.

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, the government re-imposed the price ceiling from December 10, 2010, which was removed from October 26, 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 percent and 24.0 percent, 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 percent in spite of the improved fish production during 2010.

Adverse weather conditions contributed to price increases during the middle of the year. Fish prices decreased towards end of 2010.

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

Although the import prices of crude oil increased by over 25 percent 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 percent in 2009 to 14.8 percent in 2010, while the contribution of domestic items decreased from 110.0 percent in 2009 to 85.2 percent 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 percent 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 percent in 2010 from 9.2 percent in 2009.

The year-on-year core inflation also followed a declining trend reaching 5.6 percent at the end of 2010 compared to 5.9 percent at the end of 2009.