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Frontier Research June 2016 Inflation Post Data (Sri Lanka)

​Headline inflation spiked to 6.0% YOY growth in June from 4.8% growth recorded last month. This was well above the inner band of 4.9% set by the IMF, coming dangerously close to the outer band of 6.4% for June 2016. According to IMF guidelines, given that inflation came above the inner bad, the CBSL would now have to engage in a “consultation with the IMF staff on the reasons for deviation and proposed policy response.”Headline inflation is now at its highest level since October 2013. On a MOM basis, however, it moderated to 2.1% from 2.4% growth in May.

An acceleration in Food inflation was the primary reason for the overall rise in headline inflation, growing 4.3% over the month. This is the highest monthly growth recorded in the F&B category since the start of the index, and is also well above the historic average (1.9%) with June generally being a month with higher F&B inflation due to lower supplies in the off season. Significantly higher prices in most varieties of vegetables was the largest contributor, with fresh fish and rice prices also recording increases.On a YOY basis, F&B inflation came in at 8.2%.

Non-Food inflation slowed down in June, seeing 0.2% growth over the month from a 2.5% increase seen in May. The Utilities, Household Equipment, Communications and Miscellaneous categories saw slight increases possibly due to pass-through effects of tax revisions implemented in May, while Clothing & Footwear recorded a MOM decline.

After hitting a 39-month high of 6.6% in May, core inflation moderated to 6.4% in June. This corresponded to a slower 0.4% MOM growth.

The next IMF Performance Criteria (PC) on inflation is expected to be met in September 2016 with inner and outer bands of 6% and 7.5% respectively. If the outer band is breached in September, it could imply that “access to Fund resources would be interrupted” until a further consultation takes place and “relevant program review is completed”. Based on our current assumptions, we do not expect headline inflation to breach this outer band in September but could likely be above the inner band.

The attached Post Data report contains the breakdown in inflation by sub-category of the CCPI and the NCPI.