ISSN: 1391 - 0531
Sunday May 4, 2008
Vol. 42 - No 49

Inflation hits near 30% record

By Natasha Gunaratne

Sri Lanka's inflation hit an all-time high in recent decades when it peaked at a near 30 percent, according to the latest Colombo Consumer Price Index (CCPI) figures -- up from 28.1 percent the previous month.

Inflation -- measured by the new Colombo Consumer Price Index, the CCPI (N) – also peaked to 25 percent in April, up from 23.8 percent the previous month. Economist Dr. Harsha de Silva said the last time inflation reached close to 30 percent was in 1980.

He said that while the CCPI(N) was a better reflection of inflation, the 25 percent figure was still misleading."The problem with the new index is that the government has forcibly removed part of the consumption basket. Alcohol and tobacco have been removed even though they are almost as much as an average household's expenditure on education,” he said explaining that on average Rs. 630 was spent on education a month while Rs. 510 was spent on alcohol and tobacco a month.

In a statement the Central Bank (CB) said a surge in global inflationary pressures, far in excess of expectations, caused by the continued high oil prices and a sharp rise in other commodity prices had passed through to domestic prices, causing a substantial increase in domestic inflation worldwide.

The CB has also decided to further restrict its quarterly targets for reserve money through a down revision for the remaining three quarter of 2008. Dr. de Silva said such a move should have been done months ago. "I have been arguing that there is too much money in the system and that the reserve money targets are wrong," he said.

"When growth figures came in at 6.7 percent instead of 7.5 percent which the CB used to calculate the reserve money target, it should have immediately revised the figure downward. We need a certain amount of money to sustain a certain amount of economic growth. If that growth doesn't happen, the money in the system is too much. Now, the CB has admitted that its targets are wrong and has revised them. Inflation might have been less if the CB did what it should have done. Even though it is late, I applaud it,” the well-known economist added. Dr. de Silva said he agreed with the CB there was more influence from the international prices now than six months ago but that the CB was putting the blame fully on international prices instead of adjusting its reserve money targets downward.

“Now there is a huge difference between other countries and ours. The difference is not converting. It is true that worldwide, inflation is going up but in Sri Lanka, it is hitting 30 percent. The CB has to be even more careful with the demand side issues because oil prices don’t seem to be coming down,” he added.

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