Inflation hits a record 28%

By Mandana Ismail Abeywickrema

The Census and Statistics Department has stated that the Colombo Consumer Price Index (N) hit 23.8% in March, while the previous CCPI index recorded a 28.1% rate of inflation.

The Cost of Living Index for March was posted at 6441.7 points, which is an increase of 96.3 index points from February. The index was posted at 6345.4 points in February. This is an increase of Rs. 194.74 in the expenditure value of the market basket when compared to the previous month.

The CCPI-N, which has dropped an entire expenditure group, yet showed a price increase of 1.7% in March.

The CCPI-N has increased to 23.8% in March compared to 21.6% in February, which is also the highest level to be recorded by the new index.

Ironically, the former CCPI has shown a lower increase in consumer prices in March. The CCPI has seen a 1.5% increase in March recording a 28.1% rate of inflation from 24% in February.

Meanwhile, Fitch Ratings when downgrading Sri Lanka's rating outlook last week has said that high and volatile inflation increases the risk of macroeconomic instability and discourages investment.

The government however has palmed the blame of the high inflation level squarely on high global oil prices and food prices.

A special study paper prepared by the IMF titled Pass-through Of External Shocks To Inflation In Sri Lanka, states that most of the country's inflation was not 'imported' or caused by oil.

According to the study, "Since late 2006, Sri Lanka's inflation has increased sharply relative to other economies in the region," and "the sharp increase in inflation compared to other countries in Asia points out that increases in oil prices in the recent past (a common shock to most economies in the region) cannot explain most of the increase in inflation in Sri Lanka."

The study has shown that oil prices explained only 6% of the inflation in 2006 and 2007 when measured by the CCPI(N). "With external shocks not playing a major role in influencing domestic inflation, domestic policies can be very important in containing inflation," the study paper has further stated.

"External shocks appear to explain about 25 percent of the variation in consumer prices and about 32 percent of the variation in core inflation, suggesting that other shocks that are likely to be more domestic in nature explain most of the variation in inflation in Sri Lanka."

To add to the economic woes of the country, the Central Bank has predicted high inflation for the first half of this year, saying inflation would be between 16 and 20%.

The Central Bank prediction in February has cast serious doubts over the bank's ability to achieve the initially set inflation target for 2008 of 10 to 11%.

Source: sundayleader