Sri Lanka's core inflation 9 per cent

COLOMBO: Sri Lanka's core inflation has reached 9.3 per cent at end March 2008, according to the Central Bank. The core inflation index published by the Central Bank is based on the New Colombo Consumers' Price Index - CCPI(N), compiled by the Department of Census and Statistics (DCS) and excludes food and energy items, in line with the international practice.

During recent months, there was a strong call for a proper core inflation index by various parties, as the public was unaware of the core inflation measure used by the Central Bank for its monetary policy decisions. This is the first instance that the Central Bank releases core inflation numbers, even though the Bank has long been discussing on the topic.

"Monetary authorities all over the world take their monetary policy decisions on the basis of the underlying trend in inflation which is derived by removing volatile components in a consumer price index. The underlying inflation is known as core inflation," the Central Bank said. However, according to the DCS, the headline inflation has reached 23.8% by end March.

Dr. P.B. Jayasundara, the Secretary to the Treasury, commented to the Daily News when contacted that this is due to the significant increase in international prices of fuel and food items. "During the last year, international food prices have increased by over 50 per cent due to strong demand form China and India and the diversion of several food items for bio-fuel production.

As we have allowed the domestic prices to adjust in line with international prices, without subsidising them, headline inflation has increased far exceeding the core inflation of the country, which is the true demand driven inflation, or monetary inflation. However, this kind of supply shocks are one-off and usually do not persist."

Commenting on the relatively high headline inflation in Sri Lanka, compared to other regional countries, Dr. Jayasundara said "We have clean inflation in Sri Lanka, as we haven't used any price control or subsidy to suppress the inflation. But, in most other countries price level is suppressed to some degree".

Dr. Jayasundara also commented on a recent paper by the IMF which states that the inflation in Sri Lanka is largely due to domestic policies such as monetary and fiscal policies.

"I have gone through this paper and found many technical shortcomings in it. The core inflation numbers released by the Central Bank a few days ago clearly shows that supply factors contribute to most part of the current high inflation.

The IMF has used the data until 2007 March in their analysis and it cannot be used to explain the inflation during recent months, particularly because the domestic fuel prices were subsided for most that period. According to their model only one half of the inflation is explained by both demand and supply factors.

There argument that the other half explains domestic macroeconomic policies is flawed. It is due to this kind of erroneous policy advice of IMF that most developing countries are not seeking assistance now."