Inflation reduced further in the month of October recording 20.2 percent point to point change according to the Colombo Consumers’ Price Index computed by the Department of Census and Statistics (DCS).

Inflation peaked in June at 28.2 percent riding on high commodity prices and has eased since then recording 24.3 percent in September.

The index, based on 2002 prices was 206.6 in September and declined by 0.3 percent to 206.6 in October.

Reduction in food prices caused by seasonal increases in produce after harvesting and reducing commodity prices caused by the global financial crisis have caused inflation to reduce over the past few months.

But the index does not reflect the reduction in world oil prices because domestic fuel prices have not been revised to reflect the decline of world prices.

World oil prices have reduced to about US$ 60 a barrel since peaking at US$ 147 earlier in the year but the benefits are yet to be realised with a decrease in domestic fuel prices which would cascade down to the rest of the economy.

An analyst at the DCS told the Island Financial Review that when fuel prices increase, transport costs increase disproportionally along with food and other commodity prices in the market.

"It will be interesting to see how the CCPI will react to a possible fuel price reduction," he said.

Petroleum Minister A. H. M. Fowzie told the Island Financial Review last month that the CPC cannot reduce prices until world prices stabilize.

He said, however, that he hoped to revise prices within three weeks time if not the 2009 budget is expected to propose a downward revision when it comes up for debate in parliament this week.

"At the moment we are making a profit of about Rs. 6 to a litre and this is not a significant benefit we can pass on to the people. We have to be able to make a significant downward revision if we are to demand reductions in transportation costs and other related prices that are affected by oil prices," Fowzie said last month.

"If we reduce prices now we would lose what little profits we are making at the moment," he said.

Political analysts muse whether or not a reduction in fuel prices will be used as a trump card by the government to pass the budget in parliament.

The Central Bank says its tight monetary policy is aimed at curbing the growth credit in order to stifle demand driven inflation. This has resulted in the increase of interest rates, making it more costly for firms to borrow.

However, over the last few weeks the Central Bank has reduced the statutory reserve requirement of licensed commercial banks and relaxed restrictions on banks’ ability to access the reverse repo window of the Central Bank for overnight credit. And this has brought interest rates down.

However, inflation and interest rates still remain high and analysts argue that macroeconomic fundamentals remain weak.

They say nonessential and wasteful expenditure of the public sector can and must be avoided or reduced to curtail the budget deficit, which counters the Central Bank’s attempts to rein in inflation.