[News - Business] - Inflation drops to its lowest level in more than five years

The rate of inflation in the country as measured by the point-to-point change in the Colombo Consumers' Price Index (CCPI) (2002=100), computed by the Department of Census and Statistics dropped sharply to a five year low of 0.9 per cent in June, 2009. The annual average inflation rate also continued to decelerate since November, 2008 to reach 12.5 per cent in June, 2009 compared to 14.7 per cent in the previous month. The CCPI increased by 1.3 per cent in June, 2009 over May, 2009. The contribution to the monthly increase in the Index arose mainly from sub category of food and non-alcoholic beverages (2.5 per cent). Sub categories such as clothing, housing, water, electricity, gas and other fuels, furnishing, household equipment and routine household maintenance together with miscellaneous goods and services also recorded slight increases.

Core inflation, on a point-to-point basis witnessed a sharp decline from 13.5 per cent in May, 2009 to 7.7 per cent in June, 2009. However, the monthly core index remained unchanged resulting in a marginal decrease in the annual average rate from 15.8 per cent to 15.2 per cent between the two months.

The containment of the inflation was mainly due to the lag effect of tight monetary policy stance pursued by the Central Bank and easing of commodity prices in the international market. However, it may move gradually upwards during the remainder of the year, while remaining at single digit levels throughout the period. Further, the annual average inflation rate will continue to decelerate reaching low single digit levels by the year end.

The prevalence of low inflation will be conducive to the growth prospects of the economy. Due to adverse developments that were in place during the last two quarters, it was estimated that the economy would grow around 2.5 per cent in 2009 under a pessimistic scenario. However, the economic prospects have improved significantly due to recent domestic and global developments. The end of the country's internal conflict will pave way to open up the Northern and Eastern Provinces for economic activities and the expectations of the global recovery towards the latter part of the year will provide further growth impetus to the economy which is, at present, projected to grow at a range of 3.5 to 4.5 per cent.