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Frontier Pre-Data: July 2016 for Sri Lanka

Data released by the Department of Census and Statistics (DCS) for the first two weeks of July saw mixed price movements across food items. Some categories of vegetables recorded price decreases from the highs seen in June, while some others continued to rise. Rice prices broadly remained stable, while fruits and fish prices saw slight increases. During the month of June, Food and Beverage inflation grew by 2.1% due to poor supplies.

·Despite the data indicating minor changes in most food prices, it has, however, not factored in the changes resulting from price controls imposed on 15 essential items, as well as revisions to special commodity levies to sugar during the second half of July.

·With the suspension of the VAT hike which came into effect in mid-July, there could be some downward movements in Non-Food inflation, largely in the Communications and Health categories, which could see at least a partial reversal of the increase it observed in May. However, the lack of clarity on the effects of these changes in most sectors makes it difficult to provide a more accurate estimate of prices changes in this category.

·Overall, we expect headline inflation to dip to 5.0% YOY in July from the 35-month high seen last month. Taking into consideration the reversal in the VAT hike, we estimate that headline inflation would decline by a marginal 0.3% MOM.

The attached report contains detailed charts on specific commodities, including additional graphs containing analyst forecasts on Brent prices, and a comparison of CPC import prices against global Brent prices.