ECONOMYNEXT – Sri Lanka’s inflation in the capital Colombo was 5.7% in the 12-month period to September, up from 6.0 in July, although prices rose 0.4% during the months, according to data from the Public Debt Office.
The Sri Lankan rupee is under great pressure from liquidity injections that were not prevented by the central bank’s inflation target of 4-6%.
Colombo’s consumer price index, the most watched price indicator, fell from 143.4 points to 144.1 in the 30 days of September.
The food sub-index, which contains more commodities traded and is quickly influenced by the depreciating currency and US monetary policy (weakening dollar) increased 10 percent year-over-year.
The IPCC as a whole has a smaller food component and other items such as telecommunications, education and housing may respond more slowly.
The food index increased 22% over two years, from 135.3 in September 2019 to 165.9 in 2021.
Sri Lanka’s central bank is targeting an inflation range of 4-6% on the headline CPI which led to currency crises in 2011/2012, 2015/2016, 2018 and continues into 2020/2021.
Currency crises resulting from injections of liquidity to keep rates at a target growth level and are followed by output shocks when corrective measures are taken to prevent the external sector from collapsing.
“This is a problem also observed in India and in other countries which are trying to juggle two anchor points and an unstable flexible exchange rate, by collecting foreign exchange reserves”, explains the economic columnist of EN. Bellwether.
“The Reserve Bank of India has fairly good monetary stability and less anchor disputes when it targets a wholesale price index.
“The RBI lost its grip in the face of the collapse of the Greenspan-Bernanke bubble in 2008/2009 and in 2014 it switched to a broader inflation index, losing the plot altogether. ‘has stopped collapsing since then.
“In contrast, Bangladesh, which targets reserve money – which also has problems – has done much better.
“WPI targeting was devised by RBI reformers after the 1991 economic collapse, who understood banknote issuance very well.
“In fact, this idea goes back to Henry Thornton, in the bullionist debate in Britain. Thornton, like David Ricardo, understood the central bank very well, unlike later policy advisers like JM Keynes who focused on commercialism.
Almost all successful inflation targeting central banks not only have a domestic anchor of around 2%, but they also have a fully floating exchange rate with a non-convertible monetary base avoiding anchor conflicts.
Modern fiat money central banks target positive inflation in all cases and policy errors are not corrected as ‘from the past’ unlike a cash standard where periods of inflation are followed by periods of deflation, protecting the poor.
“Inflation is cumulative and prices rise over time faster than compound interest,” says Bellwether.
“That’s why over two years, the food index has increased by 22 percent. It is in part through tricks like this that the bad central bank has been perpetuated especially after WWII and is allowed to create social unrest. ”
Under positive inflation targeting, policy errors are compounded, unlike the pre-WWII cash norm, where periods of inflation were followed by periods of deflation reversing policy errors. central bank policy. (Colombo / September 29/2021)