ISSN: 1391 - 0531
Sunday February 24, 2008
Vol. 42 - No 39
Financial Times  

Inflation in double digits over past 18 months

By Natasha Gunaratne

For the first time ever in Sri Lanka's post-independence era, inflation has been in the double digits for the last 18 months.
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 believes 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. "When the government imposes indirect taxes like VAT, excise duty and economic service charge (ESC), businesses will pass that onto the customers and it will increase the price of goods and services they sell," Sarvananthan said.

The New Colombo Consumer Price Index or the CCPI(N) introduced in December 2007 is expected to more accurately and precisely reflect inflation levels in Sri Lanka. Inflation according to the CCPI(N) has been lower than the old Colombo Consumer Price Indx (CCPI). Statistics according to both indices are currently being released by the Central Bank of Sri Lanka (CBSL) which Sarvananthan said is due to a transition period. Sarvananthan said that according to the International Labour Organization (ILO) regulations, any country which proposes to introduce a new index has to take the cost of stakeholders such as unions into consideration.

"This was done in a hurry without talking to stakeholders," he said. "They are still waiting to get some feedback from some stakeholders and perhaps they will revise it."

Director of Industrial and Construction Statistics and Prices at the Department of Census and Statistics, D.C.A. Gunawardena told The Sunday Times FT that the CCPI will be in use for another six months in order to give the Wage Board, relevant employers federations and trade union organizations to adjust their existing collective agreement to the new index.

Gunawardena explained that the CCPI, created in 1952 was primarily used for salary escalation and negotiations as opposed to tracking the movement of the prices in goods and services.

Sarvananthan said there are pros and cons to the new index. There was a need for a new index because the CCPI is over 50 years old. The number of goods in the CCPI(N) has increased to 1600 but he said the real problem is the issue of the weighting of the goods. "The weighting given to certain items have changed," he explained. "They have reduced the weighting given to food items by a third. This is detrimental because low income groups spend more on food so this really works against them."

The second major point Sarvananthan made is that in the CCPI works in the consumption pattern of the lowest income group whereas the new index takes on board the consumption patterns of all income groups. "That way, it dilutes the impact it has on the lower income groups and the impact is bad for the poorer segments of the population." Sarvanathan said he expects the trade unions to take up this issue but is not sure if the consumer groups in Sri Lanka are organized to put pressure or to create awareness. He added that he feels the government is waiting to hear from the groups.

Sarvananthan also said that the old index only accounted for people living in Colombo city as opposed to the new index which has made some improvement by taking in consideration the consumption patterns of those living in the city suburbs such as Ratmalana and Wellawatte.

He said the Sri Lanka Consumer Price Index (SLCPI) laid out a far more accurate account of the consumption patterns of the nation, taking into consideration 17 out of the 25 districts. "The conflict regions were never covered but it was still more representative." The new index is far more Colombo centric.

The SLCPI which was used for the past four to five years was published weekly by the CBSL but the last date of release was November 2007, just prior to the introduction of the CCPI(N). Sarvanathan said that according to the SLCPI, inflation in November 2007 was 26.1 percent, the highest ever. However, it did not become the official measure of inflation because regional compilation of the statistics takes too long and the new index has now come into use.

Sarvanathan said that agricultural products in Colombo are more expensive due to transportation but imported items will be more expensive in the outstations. "The net balance is hard to work out but I would have preferred a much wider coverage of the area for the compilation for the new index."

The CCPI(N) has several items which were previously not in the old index such as telephone charges, mobile phone charges, rent, electricity and water. The CCPI(N) also includes groups with several subclasses. The groups are weighted in terms of percentage.

Under 'food and non-alcoholic beverages', the subclasses include bread and cereal, meat, fish and seafood, milk, cheese and eggs and fruits and vegetables amongst others. The subclasses which are weighted the highest are bread and cereal at 17.15 percent and milk, eggs and cheese which come in at 7.56 percent.

Under the group titled 'housing, electricity, gas, water and other fuels', electricity is weighted at 4.09 percent and gas is weighted at 1.6 percent. Under the 'health' group, pharmaceutical products and medical services are weighted at 1.17 and 2.29 percent respectively.

Under 'transport', the purchase of vehicles is weighted at 0.99 percent and the operation of personal transport is weighted at 5.13 percent. Passenger transport by railway, by road and other purchased transport services come in at 1.67, 0.73 and 0.96 percent respectively. The sub classes under 'communication' include postal services, telephone and telefax equipment and services. Telephone and telefax services are weighted the highest at 3.91 percent.

Under the 'education' group, secondary education is weighted at 4.51 percent. Tuition fees which were absent in the old index are included under the same group, the sub group being 'education not definable by level' which is weighted at 0.54 percent. Under 'miscellaneous goods and services', personal care such as hairdressing salons and personal grooming establishments are weighted at 0.46 percent.

Inflation likely to remain around 16-20 % in 1st half
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 percent, an increase from 18.8 percent 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 dhal) and upward revision in the prices of petroleum products.' As measured by the CCPI(N), consumer prices increased by 3 percent in January 2008 compared to the previous month. Furthermore, the CBSL is attributing 80 percent of the increase to 'increases in food prices, while the price revision of petrol, diesel, kerosene and LP gas contributed to further 16 percent.'

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 favourable 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 percent during the first half of 2008.'

The CBSL further predicted that inflation is expected to moderate on a gradual path to 10 to 11 percent by end 2008 and 9 to 10 percent 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. "I 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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