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SL’s inflation to peak at 28% in coming months before subsiding

Sri Lanka’s headline inflation could peak at 28 percent in the next couple of months from the 18.7 percent in March,  as the full effects of the rupee float and the festive demand amid higher global commodities prices could set off a lengthy stretch of hotter prices.

The inflation rate as measured by the Colombo Consumers’ Price Index or CCPI that covers the prices in the Colombo District, has accelerated to 18.7% at end-March 2022, up from 15.1% a month earlier. 

The food inflation in this index has also jumped from 25% to 30%. These increases in food prices have not been fully reflected in the overall inflation because of the low weightage assigned to food category at 28.1%. 

Contrary to this, in the National Consumer Price Index or NCPI which covers the whole island has a higher weight at 44% for the food category. That index had recorded an inflation rate of 17.5% at end-February. 

Once its numbers are released later in this month, the national inflation might accelerate to about 20%. Whatever the index used, it shows the signs of setting a galloping inflation – a sudden jump in the inflation rate from month to month – in Sri Lanka. 

Though it is feared that it might degenerate to a hyperinflation – an increase in the inflation rate by 50% or more a month – the present case does not show evidence of reaching that level soon. 

According  to Dr. Nandalal Weerasinghe, who took over as Central Bank Governor last week, the headline inflation could climb to 25 percent and then up to 28 percent before any easing happens. 

“Things would get worse before it gets better,” he said in response to a question from a reporter last Friday. 

The 28 percent headline inflation is the highest since June 2008 when the headline inflation measured by the Colombo Consumer Price Index read as 28.2 percent. 

Thereafter, the prices started easing before settling at single digit levels about 13 years starting from February 2009 to November 2021, when the inflation was recorded at 9.9 percent. 

In March 2022, Sri Lanka recorded its highest headline inflation of 18.7 percent since November 2008.

“The inflation in the next three months has already taken place. It’s already too late for anyone to prevent inflation reaching 20 percent, 25 percent and 28 percent in the next three months,” Dr. Weerasinghe cautioned. 

In an attempt to anchor the expectations, he also said that no one should believe that today’s actions would result in inflation turning the opposite direction tomorrow.

The monetary policy typically has a time lag and Dr. Weerasinghe said the results would only become visible after about several months.

The Central Bank on Friday gave a shock treatment to the Sri Lankan economy by raising the key policy rates by 700 basis points to deal with demand side inflationary pressures.

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