Inflation up in February

Inflation increased during February to 6.9 percent, from 6.5 percent in January with general price levels in Colombo increasing by 0.24 percent during the month while food prices increased by 4 percent from a year ago, according to the Department of Census and Statistics.

Prices of food items declined marginally by 0.01percent in February from the previous month while prices of non-food expenditure items increased by 0.25 percent.

However, comparing price levels from a year ago, food prices have increased by 4 percent, data from the government statistics office showed.

The point-to-point change in the Colombo Consumers’ Price Index, or headline inflation, has been increasing since a low 0.7 percent in September 2009 to 6.9 percent this month. It is also the highest since recording to 7.6 percent in February last year.

The twelve month moving average rate of Inflation remained stable at 3.1 percent in February.

Economists and commercial bank dealers agree with the Central Bank that inflation would pick up as a result of expected increases in global commodity prices and a statistical effect, called the base effect, on the index itself.

However, this increase in inflation is expected to be short term, and the Central Bank estimates inflation to remain at single digit levels throughout the year.

But the Central Bank earlier this year warned against reckless government spending which could threaten the low inflation and low interest rate environment crucial to private sector growth.

Dealers said Treasury bill rates, considered as benchmark rates, have been inching up over the past few weeks, indicating that the government was demanding for more short term financing. (See Island Financial Review)

The government’s budget deficit estimate for 2009 was 7 percent of GDP and it proposed to reduce the deficit gradually to 5 percent by 2011 as part of an initiative of the Fiscal Responsibility Act.

The deficit for the first ten months of 2009 is estimated to be 8.4 percent of GDP and the IMF says the budget deficit for the entire year (2009) could be 1 to 1.75 percent more than the IMF target, which is also 7 percent.

The third tranche of the US$ 2.6 billion standby facility amounting to US$ 326 million, which could have come in early March, is now deferred until the next parliament sits and the budget for 2010 is formulated, and the IMF is convinced the government is committed to reigning in fiscal indiscipline.

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