Extracts from the Central Bank of Sri Lanka report, ‘Recent Economic Developments: Highlights of 2020 and Prospects for 2021’

Continued from yesterday

* With a notable increase at the beginning of the year, prices of items in the Non-food category remained mostly unchanged during the period from April to June 2020, mainly due to the lower demand for non-essential goods and services and non-adjustment of administered prices such as transport fare, communication charges, electricity and water charges with the spread of the COVID-19 pandemic in the country. Similar to 2019, an increase in house. Rentals in Housing, Water, Electricity, Gas and other Fuels sub-category, which occupies the largest share in the Non-food category in both CPI baskets, took place in January 2020, yet at a comparatively lower magnitude. This increase at the beginning of the year was coupled with an increase in tuition fees for secondary education in the Education sub-category, and resulted in the highest increase observed in the Non-food category since January 2019. Moreover, an increase in payments to medical laboratories in the Health sub-category occurred in March 2020.

However, a decline in the same was recorded in August 2020, contributed to by the downward price revision of the Full Blood Count (FBC) laboratory test. Meanwhile, Lanka IOC (LIOC) revised petrol (92 octane) price downward from

Rs. 142 to Rs. 137 per litre from 06 April 2020, but increased back to the original price on 17 May 2020. However, LIOC reduced the price of petrol (92 octane) back to Rs. 137 with effect from 20 May 2020, tallying the price maintained by the Ceylon Petroleum Corporation (CPC). Prices of arrack, beer and cigarettes have remained unchanged thus far during the year, while prices of arecanuts and betel leaves increased significantly August 2020 onwards. Meanwhile, prices of items in the Non-food category followed an increasing trend from July 2020 onwards.

Consumer Price Indices

National Consumer Price Index

* The NCPI, which recorded 137.0 index points in January 2020, declined to 134.8 index points in April, before reaching 138.9 index points in September 2020. The increase observed in the NCPI in January 2020 was driven by the increases observed in prices of items in both Food and Non-food categories. Afterwards, the NCPI declined for two consecutive months in

March and April 2020 driven by the decrease in prices of items in the Food category. The NCPI demonstrated a reversal of its previous downward trend and increased thereafter till June 2020, while the prices of items in the Food category remained as the sole contributor towards this increasing momentum. However, the NCPI remained unchanged in both February and July 2020 since the decline of the prices of items in the Food category was nullified by the increase observed in the prices of items in the Non-food category. Further, the increase observed in the NCPI in both August and September 2020 was contributed by the increases of prices of items in the Food and Non-food categories.

Colombo Consumer Price Index

* The CCPI, which recorded 134.6 index points in January, reached 133.4 index points in March 2020 and increased to 136.3 index points in September 2020. The increase in January 2020 was supported by the movement of the prices of the items in both the Food and Non-food categories. Meanwhile, the movement of prices of items in the Food category contributedtowards the decline and the increase observed thereafter in March and April 2020, respectively.

Month-on-month increases demonstrated by the CCPI in the next three consecutive months until July 2020 and September 2020 were mainly due to the price increases of the items in both Food and Non-food categories.

Headline Inflation

* NCPI based year-on-year headline inflation remained above mid-single digit level during the period from January to September 2020.

The year-on-year headline inflation, which recorded 7.6 per cent in January, peaked at 8.1 per cent in February 2020, the highest since November 2017 and reached 6.4 per cent in September 2020. Meanwhile, NCPI based annual average inflation increased continuously from 4.1 per cent in January to 6.2 per cent in September 2020.

* CCPI based headline inflation remained mostly within the targeted range of 4-6 per cent during the period from January to September 2020. Accordingly, the year-on-year CCPI inflation increased from 5.7 per cent in January to 6.2 per cent in February 2020, moved on a declining trend afterwards until reaching 3.9 per cent in June and increased thereafter to 4.0 per cent in September 2020. Meanwhile, the annual average CCPI based inflation remained stable during the period from January to September 2020, in which it recorded 4.5 per cent in January and reached 4.7 per cent in September 2020.

Core Inflation

* Core inflation remained at stable levels yet notably lower than that of the previous year, driven by the statistical effect of the high base which prevailed throughout the previous year owing to the significant hike in house rentals observed at the beginning of 2019. Even though an upward revision in house rental occurred in January 2020, the effect was comparatively minimal. Accordingly, amidst monthly increases, the year-on-year NCPI based core inflation moved on a decreasing trend from 3.9 per cent in January to 3.2 per cent in March and remained unchanged in April before continuously increasing to reach 4.8 per cent in September 2020. Meanwhile, CCPI based year-on-year core inflation was at 3.0 per cent in January and recorded 2.9 per cent in September 2020.

Producer Price Inflation

* The producer price inflation measured by the year-on-year change in the Producer’s Price Index (PPI, 2013 Q4*100) increased initially to 5.6 per cent in January, peaked at 7.8 per cent in July and declined to 7.7 per cent in August 2020. The year-on-year producer price inflation of all three sub-sectors, namely, agriculture, manufacturing and electricity and water supply demonstrated overall increases during the first eight months of the year, yet recording notable fluctuations in between.

PRICES, WAGES, EMPLOYMENT AND PRODUCTIVITY

Inflation Expectations

* Inflation expectations of the corporate sector moved mostly within 4-6 per cent, however demonstrating mixed movements, during the period from January to September 2020, while inflation expectations of the household sector remained above the inflation expectations of the corporate sector. Short term inflation expectations of both the corporate sector and household sector remained above their longer term inflation expectations. Accordingly, disruptions to domestic production and supply chains along with containment measures taken to combat the spread of the COVID-19 pandemic, import restrictions imposed by the government, depreciation of the local currency, relaxed monetary policy stance and expected recovery in demand and economic activities with the ease of restrictions related to the COVID-19 pandemic emerged as main reasons for their high inflation expectations. Meanwhile, subdued demand and economic activities, and fall in international oil prices amidst the spread of the COVID-19 pandemic, upswing in home gardening, expected improvements in domestic production, expected relaxation of import restrictions and recovery of supply chains with the ease of the COVID-19 pandemic were cited by respondents as reasons for their low inflation expectations in the longer term.

Wages

* Nominal wages of public sector employees, as measured by the public sector wage rate index (2016*100), increased significantly by 11.1 per cent during the period from January to August 2020 compared to the same period of 2019. This increase was due to the introduction of a new non-pensionable monthly interim allowance of Rs. 2,500 with effect from

01 July 2019 to all public sector employees and the addition of final tranche of the special allowance and interim allowance to the basic salary of public sector employees, with effect from 01 January 2020. Accordingly, real wages of the public sector employees also increased by 4.3 per cent during the period from January to August 2020 compared to the corresponding period of the previous year.

* Nominal wages of the employees in the formal private sector, as measured by the minimum wage rate index (1978 December*100) of employees, whose wages are governed by the Wages Boards Trades, increased marginally by 0.2 per cent during the period from January to August 2020 compared to the same period of 2019. However, real wages of employees in the formal private sector declined by 4.4 per cent during the period from January to August 2020 compared to the corresponding period.