ISSN: 1391 - 0531
Sunday April 13, 2008
Vol. 42 - No 46
Financial Times  

On inflation, money printing - Right of reply

The Central Bank’s Director of Economic Research has sent a letter responding to comments made by economist Dr. Muttukrishna Sarvananthan on inflation issues in last week’s edition of The Sunday Times FT.

“This refers to the comments made by published in your newspaper by Dr. Muttukrishna Sarvananthane. It was ironic to note that his argument has a very basic fact wrong. He argues that most prices were stable during March 2008 and therefore the inflation of 23.8 per cent recorded during the month of March cannot be explained by increases in oil and other commodity prices in the world market! He has, quite surprisingly, forgotten the basic fact that the year-on-year inflation (23.8%) compares the change in price levels between March 2008 and March 2007 (during a 12-month period). This statement displays a serious lack of basic knowledge in concepts and the computation of inflation.”

In response,
Dr. Sarvananthane says:

“My comments on the rise inflation in March 2008 was included in the news item which journalist Natasha Gunaratne has compiled in a box on page 12 of The Sunday Times FT. The first paragraph of the news item in the box was not mine and it was written by Gunaratne. The rest of the contents in the box is my response to the following two questions the journalist asked me to comment on: (1) With the latest inflation figures released for March 2008, inflation has increased in the CCPI and CCPI(N), at 28.1% and 23.8% respectively. Again, what are some of the reasons behind this increase? Food prices increasing, oil prices, etc...?, (2) Also, there was a recent study done by the IMF which we will publish in our paper this week which said that increasing global oil prices and increases in food prices play a small role in contributing to increased inflation? Do you agree with this?:

In my response to the first question posed by the journalist I did not refer to any particular measure of inflation whereas the Director of Economic Research refers to the point-to-point change in inflation (in his reply to my comments), which was 23.8% for March 2008. My answer to the first question was implicitly based on the monthly change in inflation in terms of the CCPI (N) and the CCPI. The monthly change in inflation in terms of the CCPI (N) was 1.7% in March 2008, which has decelerated from 2.8% in February 2008. However, the monthly change in inflation in terms of the CCPI was 1.5% in March 2008, which has accelerated from 0.7% in February 2008.

I thank the Director of Economic Research at the CBSL for refreshing my knowledge on the conceptual issues involved in the computation of inflation. As an academic researcher I always value criticism and public debate on issues of national importance.
However, if the Director would have cared to read a news item on inflation compiled by Natasha Gunaratne and published in same newspaper on February 24 (page 2 - last section on "Explaining the Indices", which is entirely based on my reply to the questions posed by the journalist) he would have known whether my comment displays "......a serious lack of knowledge in concepts and the computation of inflation."

Furthermore, the Director of Economic Research at the CBSL could also verify my knowledge on the concepts and computation of inflation from his counterparts at the Department of Census and Statistics (DCS) who made a public presentation on the new cost of living index [CCPI (N)] on January 31, 2008 to members of several trade unions on which occasion I too made a critical analysis of the CCPI (N).

In fact myself and the DCS concur that the annual average rate of inflation should be the official measure of inflation in lieu of the point-to-point rate of inflation used by the Central Bank. I stand by my statements made to Natasha Gunaratne published on page 12 of The Sunday Times FT on April 6.


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