Downward movement in inflation amidst misconceptions

The considerable decline in headline inflation would have definitely provided a sense of relief and reprieve to the consumers in this festive season. The usual grumble about the prices of commodities recording sharp gains coinciding with the Sinhala and Hindu New Year is not heard during this year. 

The headline inflation, as measured by the Colombo Consumer Price Index (CCPI), dropped to 0.9% during March from 5.9% in February. The unprecedented surge witnessed in the prices of vegetables at the beginning of the year too has subsided with the disappearance of rainy weather conditions. Although there were fears about a substantial rise in the price levels of commodities due to the increase in the rate of VAT from 15% to 18% as well as its increased coverage when the year began, such projections have not turned into reality. The drop in the prices of essential imported items like LP gas and milk power would lessen the burden of masses. The Government’s decision to import eggs has certainly paid off with consumers now being able to purchase them at Rs. 45 to 50 from the retail market. If eggs were not imported, its prices could have reached stupendously high levels, as both Ramadan and Sinhala New Year are taking place concurrently.

Inflation is considered as the worst enemy of the poor and monetary authorities around the globe do their best to fight inflation as part of their core responsibility. Many have forgotten Sri Lanka’s inflation rate recorded a staggering 69.8% in September 2022, probably the highest in its history since the Central Bank (CB) was established in 1950. A contractionary monetary policy was employed by the Monetary Authority in 2022 to fight such extreme inflation. Unfortunately, the concept of inflation has not been properly understood not only by the ordinary citizens in this peculiar island, but even by prominent spokesmen on economic affairs of political parties who aspire to be in charge of key responsibilities with regard to steering the country’s economic policy in the future. 

Inflation reflects the rate at which the prices of goods and services consumed by the general public increase over a period of time. However, when the media reports that the inflation has come down, the masses are under the impression that what is conveyed is a decline in the general price level of the economy. Such misunderstanding forces them to question the validity of statistics published by the Government. Notwithstanding the decline in the headline inflation, the cost of living still remains at an elevated level because of the galloping inflation experienced by the economy in 2022. Recently, a prominent official of the Department of Census and Statistics (DCS) described the burden consumers have to undergo as a result of the unprecedented increase in the general price level of the country from 2021 to 2022. According to the DCS, a household of four members for the month of January this year required Rs. 68,056 to satisfy both their food and non-food basic necessities, which represents an increase of 144% compared to 2019. The unbearable cost of living has compelled many Sri Lankans to seek overseas employment in order to support their lifestyles under the current high cost of living regime as salaries offered from local employment are insufficient to maintain their desired standard of living. During the economic crisis, people were forced to adopt coping strategies whereby adjustments were made to their consumption patterns for survival. Spending on powdered milk recorded a significant decline while people gave up eating expensive food such as meat and fish.

The CB under the leadership of Governor Nandalal Weerasinghe is conscious of the importance of maintaining price stability to safeguard the best interest of the economy. Admirably, the new Central Bank Act provides a greater autonomy to the Monetary Board to conduct its monetary policy effectively to achieve price stability unlike in the past.