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Inflation may turn a corner this month as prices appear to have peaked

Sri Lanka’s headline consumer prices could turn a corner in October from a likely peak in September, due to higher base effects last year and the back-to-back deceleration seen in monthly food prices since July.
 
However, the consumers are far from being able to catch a breath, as they will continue to confront double-digit prices through the end of next year. 
The data showed that the food prices, which account for the biggest share of the inflation basket, have been slowing for three months in a row after a June surge, when a slew of higher taxes, including the Value-Added Tax, came into effect amid acute commodities shortages and a sharp energy price revision, which pushed up inflation over 50 percent from a year earlier.  

Yet, the food prices measured on a monthly basis, which rose to 18.9 percent in June, continued to decelerate to 5.8 percent in July and 2.1 percent in August, before easing further to 0.9 percent in September, reflecting that the prices of consumer staples are mostly settled for now at their current all-time high levels, contributing less to the overall increase in the consumer price index.

In fact, in September, it wasn’t the food prices that pushed the overall Colombo Consumer Price Index (CCPI) higher but non-food inflation.

According to the prices measured on a monthly basis, the food prices contributed only 0.35 percent to the overall prices but the non-food prices had a much more pronounced 3.42 percent contribution, pushing the CCPI by a combined 3.8 percent in September over August, accelerating from the 2.5 percent increase between July and August.

The main reason for higher non-food inflation in September was the full effects of the outsize electricity price revision, which came in August and the revised water bills from September.

Compared to the annual prices, sustained monthly price movements provide better insights to gauge the future trajectory of consumer prices. Although inflation may have possibly peaked in September, it by no means suggests that the job of the Central Bank is done, as the people in Sri Lanka will continue to battle inflation as high as 30 percent, even a year from now, an inflation forecast presented to the International Monetary Fund showed. This reflects that the Central Bank will have to maintain a tighter monetary policy through next year at the cost of growth, as the economy is not projected to show a recovery until 2024. The Central Bank can only claim victory of crushing inflation when it brings down the prices to a range between 4-6 percent, measured annually and until such time the people will continue to be impoverished at a rapid pace.

Sri Lanka’s headline inflation measured by the CCPI rose to 69.8 percent in September from a year ago, while the food prices rose just shy of 100 percent.