Inflation expected to normalise at 2.5 pct next year

“The Consumer Price Index (CPI) shrank by one per cent during the first eight months of 2020 and is expected to continue for the rest of the year. The contraction was due to lower pump prices on account of weaker global crude oil prices, as well as the discount given on electricity bills as part of the stimulus measures.

“However, the core index increased by 1.2 per cent, indicating sustained domestic demand along with gradual resumption of economic activities,” the MoF said in its Economic Outlook 2021 report released today.

Meanwhile, the ministry said the Producer Price Index (PPI) is also expected to improve in 2021 following the projected recovery of the domestic and global economy.

The PPI by local production declined by 2.4 per cent during the first eight months of 2020 and is expected to remain stable due to low input cost.

“This is attributed to weaker global commodity prices, particularly that of crude oil and natural gas.

“The PPI sector was weighed down particularly by a significant contraction in the mining sector (-32.7 per cent), followed by a contraction in other sectors, namely water supply (-0.6 per cent), manufacturing (-0.2 per cent) and electricity and gas supply (-0.2 per cent),” it said.

In contrast, the index for the agriculture, forestry and fishing sector rose by 12.5 per cent.

According to the report, the analysis has established bi-directional properties between the CPI and PPI during the period under review.

“It indicates that the time taken for prices to adjust to long-run equilibrium varies between both price indices, implying there are imperfections in the market.

“Thus, there is a need for a more effective supply management policy to contain the transfer between the two indices,” it said.