Inflation at a high of 7.6% Driven by rising food and non-food prices

Inflation, as measured by the Colombo Consumers’ Price Index (CCPI), decelerated to 7.6 per cent last month, compared to the 7.8 per cent in October, whilst on a month on month basis, to last month, it had increased by 1.2 per cent, the Department of Census and Statistics said.

Both, the food and non-food baskets, contributed to the increase in inflation, the Department said.

The Central Bank, in a recent report, warned that inflation has eaten into the wages of those in both the private and public sectors, signalling……a build-up of wage pressure and productivity deteriorations in the near future.

The CBSL said that disturbed weather patterns have caused the prices of vegetables, rice and coconut to rise.

‘If administered prices are also increased, inflation in the non-food category would also rise,’ the CBSL warned.

In this connection, the Government has committed to the International Monetary Fund (IMF) to introduce automatic pricing formulas based on world market prices on petroleum fuel and the exchange rate for fuel at the pump, in March, and electricity prices in September, for which prices currently are administered.

Buttressing the possibility of a rise in petroleum prices and its impact on inflation, the CBSL said that the international commodity prices, led by oil, which remained at benign levels in the recent past, are showing signs of increase. ‘Along with the weakening of the Sri Lankan rupee, the impact of price developments in imported commodities will be more prominent in relation to the local price levels,’ the CBSL warned.

However, wage erosion due to inflation can be corrected by remedying the asymmetry of the current tax structure, by reducing the bias towards indirect taxes to direct taxes, the CBSL said. Sri Lanka’s indirect taxes comprise 82 per cent of the total tax revenue, whereas direct taxes contribute 18 per cent.
The current tax structure’s slant towards indirect taxes cause wage erosion due to an increase in inflation.

CBSL goes on to say that irrespective of an employee’s income level, the average consumer is compelled to pay a certain amount of fixed taxes at the point of buying/consuming goods and services.

As a result of these indirect taxes, it raises the cost of goods and services and in turn, inflation, and leading to wage erosion.

‘Apart from remedying ‘real’ wage erosion such as by increasing nominal wage levels, this erosion should be looked at from different aspects at which remedies can be offered by expediting reforms to the tax structure and productivity linked compensation packages,’ the CBSL recommended.

Meanwhile, the Government plans to reduce indirect taxes to 60 per cent, while increasing direct taxes to 40 per cent. However, no timeframe has been set to achieve this goal.