Download Core Inflation - Central Bank of Sri Lanka

Communications Department
30, Janadhipathi Mawatha, Colombo 01, Sri Lanka.
Tel : 2477424, 2477423, 2477311
Fax: 2346257, 2477739
E-mail: [email protected], [email protected]
Web: www.cbsl.gov.lk
Press Release
Issued By
Date
Statistics Department
2008 – 03 -31
Underlying Inflation in Sri Lanka
Factors of Rising Inflation
The rising inflation has become a global concern and it is mostly driven by three factors. The
foremost important among these, is the increased demand for consumer goods as well as for oil,
generated from rapid economic growth in emerging economies, namely China and India. The
second factor is the world supply shortages of agricultural commodities created by crop failures in
major producing countries due to bad weather conditions, mainly wheat and milk foods. Third
factor is the diversion of major agricultural produce such as sugar, maize, wheat, corn and edible oil
to bio-fuel production due to high oil prices, whereby creating supply shortages in the world
market. The impact of these factors on inflation has been very severe for countries like Sri Lanka
which heavily depend on imports for such items. Food prices in Sri Lanka have closely followed
FAO global food price index which has risen sharply in 2007 (chart 1).
Chart 1. Food Price Movements
FAO Food Price Index
(1998-2000=100)
CCPI(N) Food Index
(2002=100)
200
200
180
180
2007
160
140
2007
160
2006
2006
120
140
120
2005
100
100
J F M A M J J A S O N D
J F M A M J J A S O N D
Core Inflation
The inflation arising from changes in food and energy prices are volatile and often subject to
temporary fluctuations caused by supply shocks, mostly driven by weather disturbances or external
shocks, and changes in administered prices or tax policies which are beyond the control of the
monetary authority.
Monetary authorities all over the world take their monetary policy decisions on the basis of the
underlying trend in inflation which is derived by removing volatile components in a consumer price
index. The underlying trend in inflation is known as core inflation.
Estimation of Core Inflation
There is no unique method of estimating core-inflation. Different countries use different methods.
However, many countries use the exclusion method because of its simplicity of computation, easy
understandability by the public, derivability without delay, easy replication and verification by
others, and increased transparency and accountability of calculation. As revealed in Table 1, a
number of countries derive a measure of core inflation by removing food and energy items from a
consumer price index.
Table 1. Selected cross country comparison of core inflation measures
Country
Official Core Inflation
Industrialised Countries
Canada
UK
US
CPI excluding food, energy and indirect taxes
Retail Price Index (RPI) excluding mortgage
interest rates (RPIX)
CPI excluding food and energy
Japan
CPI excluding fresh food
Emerging Market Countries
Philippines
CPI excluding food and energy
Pakistan
CPI excluding food and six energy items
China
Thailand
CPI excluding food and energy
CPI excluding fresh food and energy
Malaysia
CPI excluding food and energy
Movement of Core Inflation in Sri Lanka
In line with the international practice adopted by many countries, the core-inflation compiled for
Sri Lanka excluding food and energy for 2007 is shown in Table 2. Accordingly, the core inflation
calculated on the basis of New Colombo Consumer’s Price Index (CCPI(N)) shows an inflation of
only 8 per cent on a point to point basis and annual average inflation of 7.5 per cent in 2007.
Accordingly, demand management polices of the Central Bank has been successful in containing
the underlying inflation well below 10 per cent throughout the year. This trend has continued so far
in 2008 as well.
Table 2. Headline and Core Inflation in Sri Lanka
(YoY % change)