For the first time ever in Sri Lanka's post-independence era, inflation has been in the double digits for the last 18 months, writes Natasha Gunaratne
Several factors have contributed to this occurrence, most notably being the rapid increase in public expenditure over the past three to four years. Principal Researcher at the Point Pedro Institute of Development, Dr. Muttukrishna Sarvananthan said he believed that in addition to the increased spending, there is an increased reliance on domestic borrowing which increases public debt and leads to printing money. The increased reliance on indirect taxes is another contributing factor to the rising inflation. Sarvananthan added, that when the government imposes indirect taxes like VAT, excise duty and economic service charge (ESC), businesses do pass that onto the customers and hence it increases the price of goods and services they sell.
Statistics measured by the CCPI(N) released by the CBSL puts inflation, as measured by point to point change, in January 2008 at 20.8 per cent, an increase from 18.8 per cent in December 2007 while the annual average inflation rose to 16.4 percent.
According to a press release, the CBSL stated consumer prices increased in January 2008 largely due to low supply of domestically produced agricultural commodities such as rice, vegetables, coconut and fish. This was 'exacerbated by the continued increase in world prices of certain food products (wheat, milk products, sugar and pulses) and upward revision in the prices of petroleum products.' As measured by the CCPI(N), consumer prices increased by 3 per cent in January 2008 compared to the previous month. Furthermore, the CBSL is attributing 80 per cent of the increase to 'increases in food prices, while the price revision of petrol, diesel, kerosene and LP gas contributed to further 16 per cent.'
The CBSL also concluded that an upward movement in inflation was observed since mid 2007 largely due to the removal of fuel subsidy and increases in prices of imported food products. The pass through of international price increases, though it leads to a one time increase in prices, will have a favorable impact on containing future inflation by eliminating the need for subsidizing same, through expansionary borrowings of the government.
This one time increase will be gradually dissipated over the next few months. Hence, until it is fully dissipated, inflation is likely to remain around 16 to 20 per cent during the first half of 2008.'
The CBSL further predicted that inflation is expected to moderate on a gradual path to 10 to 11 per cent by end 2008 and 9 to 10 per cent by end 2009. However, it concluded that any unforeseen significant price changes in the international market would deviate from the expected path.
Explaining the Indices
All the consumer price indices have a base year. The base year of the CCPI is 1952, the base year of the CCPI(N) is 2002 and the base year of the SLCPI is 1995 – 1997. The base year index is equal to 100 points and changes thereafter could be higher or lower than 100, usually higher than 100, said Sarvananthan.
The CBSL releases statistics on both the indices at the end of every month, the most recent being January 2008, giving the monthly change (%), the point to point change (%) and the annual average change (%).
Month to Month Change (%)
The monthly change in the consumer price index refers to the consumer price index of January 2008 compared to the monthly price index of December 2007.
Point to Point Change (%)
The point to point change means the consumer price index of January 2008 compared to January 2007, the consumer price index of the corresponding month last year.
Annual Average Change (%)
The annual average change means the average consumer price index of the past 12 months compared to the average consumer price index of the previous 12 months.
Sarvananthan said the official measure of the rate of inflation worked out by the CBSL uses the point to point rate of change which he does not agree with. He would use the annual average rate of inflation because it represents the average for a period of one year.
He added that the monthly change and the point to point change of inflation could be a temporary phenomenon due to seasonal variations in commodity prices or due to some unforeseen circumstances such as fish prices rising soon after the tsunami.
He explained that many food crops such as paddy is seasonal and therefore, prices would drop during the harvesting season and increase during the off season. Generally, there is also a tendency for commodity prices to rise during festive seasons such as the Sinhala and Tamil New Year as well as the Christmas and New Year period.
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