By the Economist
The increasing cost of living is the hottest current economic issue. The rise in costs of utilities, basic consumer items and several other necessities, have become a serious burden on the fixed middle and lower income earners.

Worst still is a growing feeling that the government is so preoccupied with the peace process that they are unable to respond adequately to the people's price crisis.

The government's popularity is at stake, if no tangible efforts are made to contain prices. In a context of experiencing spiralling prices in recent weeks, it is difficult to believe that the inflation rate decreased last year to 9.6 percent from 14.2 percent in 2001, according to the Colombo Consumers 'Price Index (CCPI).

According to the Colombo District Consumer Price Index (CDCPI) the rate of price increase was still lower. Last year's inflation rate was only 6.8 per cent. There are statistical reasons why the indices appear to disclose lower than consumer's perceived price increase.

Consumers too tend to perceive overall price increases to be high owing to their perception being based on a few prices that affect them. Nevertheless, in fact prices have increased significantly even on the basis of these indices. In the last two years consumer prices have increased by about 25 per cent, though the rate of inflation declined last year compared to the previous year. Although the annual rate of inflation decelerated, according to both indices, they disclose a sharper rise in prices in December than in the previous month.

There has also been a definite higher increase in prices in the latter months of the year compared to the earlier months of the year.

In December alone prices rose by 2.5 per cent over the previous month according to the CCPI and were 11.3 per cent higher than the prices prevailing in December 2001. According to the Central Bank, the main contributory factor for the increase in the CDCPI in December was the increase in food prices.

Most varieties of vegetables, fish, some varieties of rice, coconut and eggs increased during the month. December is a month of higher prices of consumer, especially food items, but last December's price increases appear to have been even more than the usual seasonal increase. The fact that they were over 11 per cent more than the prices of the previous December is indicative of this.

What is worse is that prices have continued to rise since December. The gas price, petroleum price, wheat flour and bread price increases are most significant. Promises of bringing down consumer prices have once again proved futile. Indications are that prices would rise further. There are also gathering dark clouds that portend soaring prices in the near future. If war breaks out in the Middle East, prices would surely escalate fast.

Since Bush and Blair are adamant on attacking Iraq, neither waiting for the UN inspection team's results nor heeding the United Nations nor the voice of their own people, war appears to be a matter of time. Then prices will sky rocket, especially as a result of increased oil prices.

The worse case scenario projects oil prices to rise from the current US$ 32 per barrel to as much as US$ 80.

There are fundamental reasons why prices have increased and will continue to increase. Foremost among these is the significance of imports in our consumption. These prices rise, both due to increases in international prices and the depreciation of the currency. In addition, domestically produced goods too have a significant import content. Increases in fuel, electricity and gas prices result in spiralling cost-push inflation.

The high cost of domestic agricultural produce is a significant factor in increasing food costs. The costs of producing food are much higher in the country than among neighbouring countries. For this there are complex reasons and no simple solution is possible.

Post harvest losses too are large and marketing of agricultural produce leaves much to be desired.

These add to the marketing margins, depressing producer prices and raising consumer prices. Freer imports would reduce consumer prices, but would affect the large farming community adversely, increase poverty and create social tensions in rural areas.

What these imply is that if consumer prices are to be contained, considerable thought should be given to several aspects of economic policy. There are macroeconomic issues as well as sector issues that have to be looked into. Neither a reliance on market forces nor price controls are likely to automatically yield results. There is no easy fix.

The moot question is whether the government is taking a serious look at this vital question. The public seems to think the government is unconcerned with the plight of the poor consumers.

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