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How Sri Lanka is trying to manipulate inflation numbers: fuss-budget
11 Apr, 2007 23:51:03
By Fuss-Budget
April 11, 2007 (LBO) – When Sri Lanka's statistics office says it is computing a new index to better reflect 'true' inflation it is simply treading a well beaten path frequented by innumerable money printing countries throughout monetary history.
The Department of Census and Statistics has said it was putting out a new index in June on the orders of an 'economic council' headed by the country's president.

Predatory third world governments have standard responses to money printing, which causes inflation and balance of payments crises; starting with exchange controls, import controls, and - you guessed it - manipulating the inflation index to understate inflation.

Typically what money printing governments do is to take out or reduce the weight of items that are moving up the fastest.

But Why?

The main reason they do this of course is to avoid political embarrassment. As fuss-budget has pointed out in previous Thrift Columns, inflation is the final scorecard of macro-economic management, or in the case of third world countries like Sri Lanka, the lack of it.

The other reason is to defraud workers. In The Thrift Column - Monetary Plunder we showed how Sri Lanka's government and big business plunder the poor, the assetless and working classes through the hidden tax of money printing, negative real rates and budget deficits.

But the indexing of wages and other benefits to a Consumer Price Index (CPI) prevents a government from profiting through inflation. So you change the index.

Sri Lanka has produced several CPI indexes earlier. But they were not recognized as 'official' because the trade unions had refused to accept them, guessing rightly that the government was trying to short change them.

When Sri Lanka's politicians - and officials as well as mis-guided economists who parrot the propaganda - say the Colombo Consumer Price Index (CCPI) is wrong, its base is too old, it has too much food in it, it is not representative (bottom 20 percent of Colombo's workers), etc, etc what they are really saying is that it is too high for their political comfort.

Political Inflation

Once upon a time inflation was not defined as 'a rise in general price levels' but as an increase in the quantity of money. The Bullion Report of 1810 commissioned by Britain's parliament to report on a fall of the Pound hit the nail on the head two centuries ago when it said, 'Inflation is an increase in the money supply'.

You can still see this in old dictionaries, though you may not see them in post-Keynesian economic texts.

Politicians love the idea of central banks and money printing because it gives them power to spend, and politics rather than economics is perhaps more responsible for the change in the definition.

Now the inflation definition has no cause, as if the 'general price level' just goes up for the heck of it.

This is also why the concept of cost-push inflation has captured the imagination of politicians and also central bankers who want to hide their inability to maintain price stability.

If there is so much cost-push inflation how come developed countries keep inflation at 2 or 3 percent? How did Maldives keep it at 3.7 percent with GDP growth of 18.2 percent last year? How does Singapore keep it at 1.2 percent?

In fact, productivity is growing so fast that the tendency for most modern economies is to deflate. For example fish prices fall in the Maldives despite rising fuel costs.

What a 2.0 percent 'inflation target' does is to allow governments to print just a bit of extra money and supplement their tax incomes, without hurting the poor too much.

That is why the Fed tightens monetary policy when oil prices rise. Our central bankers will say how can you fight cost-push inflation with monetary tightening?

In reality what happens is that the US government goes without some of the productivity gains or deflation it would have skimmed off through money printing to compensate for the rise in oil prices.

Even Sri Lanka imports all the global technological developments that go towards productivity growth; computers, cell-phones, new production methods and what-not.

Not only that, as a trading nation we import the productivity gains of other economies when we import goods.

That is partly why inflation plummeted in 2002-2003 when money printing stopped, despite items like petroleum going up every month.

Index Nonsense

The official argument that the CCPI is not representative and should be scrapped as a wage index tool because it represents only the bottom 20 percent of Colombo's workers is clearly nonsense, as well as being a typical argument that we can expect from a predatory third-world pseudo-pro-poor government, or even a less predatory one in a developed country.

This is exactly what a cost of living allowance should give. The poorest of the poor segments of workers, most of whose salary goes to food, should get enough of a cost of living allowance adjustment to eat.

What does the government, the high powered economic council and the economic pundits who trash the CCPI expect the bottom 20 percent of manual workers to do? Starve?

For example the United States uses a CPI calculated by the Bureau of Labour Statistics (BLS) called the CPI-W meaning workers inflation (bottom 32 percent of the population), to index wages.

In fact Sri Lanka's CCPI was adjusted, which the pundits have conveniently forgotten.

Then the Sri Lanka Consumer Price Index covers the bottom 80 percent of the population. It has a 1996-1997 base, but that also largely shows the same trend as the CCPI.

However SLCPI sometimes move faster than the other in a 12-month period.

But if you take a longer period both indexes show the same inflation despite their weights being different.

For example in the 12-months to January 2002 the CCPI grew 8.8 percent and the SLCPI grew 13.6 percent.

But 25-months later in February 2003 the CCPI had grown by 22.3 percent and the SLCPI by 21.7 percent, a difference of just over one half of a percentage point.

Or take the 4-year period from January 2001 to January 2005, the CCPI grew by 42.5 percent, and the also SLCPI by 42.4 percent.

Both indices if fact showed exactly the same inflation over a 4-year period. Why?

That is because the index showed how much the value of the rupee has fallen compared to the goods and services available in the economy.

Any basket broad enough is likely to show the same inflation.

This shows that the arguments against CCPI are baseless and are simply politically motivated.

In fact a cursory glance at the graph 'Fairest Index' will show you that the CCPI which is Colombo-based follows monetary conditions or printed money much more quickly and closely than the country-wide SLCPI.

Of course, you can 'doctor' the basket to show lower inflation. If you put a lot of imports in a basket it may grow slowly because it will reflect productivity gains in foreign countries.

This type of manipulation is found not only in third world basket case countries but also the United States, the home of the Federal Reserve and low inflation. But more on that later.

Volatility

Are food prices more volatile? Surely so. Vegetables and fish are more volatile because they are domestically produced and cannot be readily imported. So they respond first to money printing. Products that are imported will be affected later when the currency depreciates.

(If the statistics department wants to take a page out of the United States book they can use a lot of food prepared outside-the-home in the index because commercial food prices do not change immediately unlike at-home-produced food.)

An index that has a higher proportion of food will certainly grow faster. Rents, house prices will adjust much later. When an asset bubble pushes house prices up, rents will go up maybe one year or two years down the line.

Then of course exchange rates will depreciate almost immediately if you print a lot of money (balance of payments crisis) but any unadjusted inflation differential (like now a 13.7 percent overvaluation of the real effective exchange rate) takes longer to correct.

Such technical overvaluations may correct only several years after a money printing binge when exporters and domestic producers have been given a good thumping and the trade deficit widens.

So naturally when economists say there is a 24-month relationship between M2b and the price index they are correct. Some things take time to adjust. But make no mistake, if you print a lot of money prices go up immediately, like in two to six weeks.

We showed in The Thrift Column – Rupee Slide how the relationship between M2b growth and inflation completely broke down in 2006. There isn't a direct relationship between M1 growth even.

That is because when inflation goes up very fast, and you create a balance of payments crisis, and if the central bank tries to defend the rupee, M1crash lands spectacularly, dragging M2 with it (due to foreign reserve loss), while inflation continues to move up until the excess demand is dissipated or the rupee depreciates.

Giggle

It is really funny to see high powered economists saying pompously that monetary policy will take 18 months to take effect, or 24 months to take effect, etc.

Do they really think that just because a bank note has a signature from a finance minister of a two-bit third world country, that it has acquired divine powers allowing it to behave differently from any other commodity? Come on, tell that to the birdies!

The Sri Lanka rupee is just like Sri Lanka paddy. It cannot be exported. If you over-produce, its price falls. And pretty quickly, just like paddy.

America can get away with more money printing than us because dollars can be exported, like Sri Lankan tea. There are enough people out there who are willing to use dollars backed by relatively better monetary policy, so Uncle Sam can sit there and collect seigniorage revenues quite happily.

I mean let's face it, you don't even need the US Federal Reserve to buy US government debt, central banks from China to Sri Lanka are queuing up to do it with tongues hanging out.

The ignorant so-called leftists like the JVP, the do-gooding Oxfams of this world think that the US enslaves the world through IMF and World Bank conditions and their loans.

Think again. It is the IMF and World Bank conditions that allow us to stand on our own two feet, while it is the mis-guided policies that make our economy and our currency subservient to that of the United States.

Can the poverty merchants of the so-called 'left' even understand the concept of billions upon billions dollars of seigniorage revenues that the 'hard currency' nations are skimming off the rest of the world, aided and abetted by their very own actions?

Now the good lady that runs the Census Department has reportedly denied that she is going construct an index that understates inflation. She is going to put three-wheeler prices, private tuition, and medical care into the new index and do a professional job.

What happens if that index shows an even higher inflation than the CCPI? It is to be hoped that the recent fate of her colleague in Argentina does not befall her.

Argentina is a typical badly managed Latin American country with high inflation and high concentrations of wealth. In its time it has had 700 percent inflation, debt default, BOP crises the lot.

It has tried to abolish the central bank and go back to a currency board. It has 'dollarised' the economy. But its budget deficits and populist politics keep getting in the way. Not surprisingly the state is always trying to find ways to show lower inflation.

One brainwave of the current Kirchner government was to restrict meat exports to prevent beef prices from going up and put price controls. Farmers then switched from beef to soybean production and now beef prices are even higher and there are less export earnings as well.

Kirshner can surely teach a thing or two to our Somawansas and Weerawansas and presumably our economic policy committee as well.

The government in Argentina has been complaining just like ours and any other money printing state in monetary history, that their index overstates inflation.

In February 2007 inflation in Argentina was uncomfortably high. President Kirchner's answer? Replace Graciela Bevacqua, the lady who was in charge of price indices at Indec, Argentina's national statistics office!

Giggle Giggle

Fuss-budget in The Thrift Column – Last Refuge said the 'core inflation' index of the central bank was like a transparent thong bikini that did not cover the nakedness of the central bank, when in 2006, authorities claimed the 'core inflation' index was going down and did not tighten monetary policy.

It went down obviously because they took out the goods that responded most quickly to inflation, and kept the rest, like rents which takes years to adjust and the miscellaneous items of the index. (Actually miscellaneous section also mimics the overall index though the percentages are less, just do the numbers and see).

It is so sad that the central bank is trying to conduct monetary policy on what is clearly a lagging indicator. You need leading indicators not lagging ones.

In the annual report issued last month, the central bank said there was demand pressure in 2006: "This was indicated by the rising trend of core inflation, which is the part of overall inflation more sensitive to monetary expansion"

Sad. Really, really, sad. What does the central bank imagine vegetables and other foods are priced with? The currency units of la la land? And not the rupees blighted by printing? Do you really believe that?

Everybody laugh! Ha! Ha! You can excuse the Bank of England for using RPI-X because they are trying to target a 2 percent inflation rate and do not want to tighten monetary policy unnecessarily because inflation goes up by an extra tenth of one percent.

But we have inflation of 8, 10, 15 and 20 percent, for the love of little apples! Those are not targets that you have to hit with a sniper rifle with a telescopic sight.

Even 10 percent is like the side of a house even blind man should be able to hit. You should not need a core inflation index to tell you that your inflation is monetary if it is higher than one or two percent.

If we do not mess-around with domestic taxes, an open trading economy should only have the average global inflation rate - or less if there are productivity gains.

Central Bank also seems to be more confused about the use of core-inflation as a target in other countries.

"Many countries use core inflation in the conduct of monetary policy, as core inflation is an indicator that could be targeted by monetary policy with a greater effectiveness," the annual report said.

Beg pardon learned Sirs and Mesdames. Countries that have inflation targeting, (including Britain) do not really target core inflation.

In a country that has an inflation targeting regime the parliament gives a headline inflation target to the monetary authority which they have to keep - at least parliaments that have worked out the basic truths about inflation.

Say Britain gives a 2 percent target to the Bank of England. In Britain from 2003 this has been the CPI not RPI-X.

This is natural enough and is in the tradition of other countries which pioneered inflation targeting.

After all that is the inflation that the people feel, that is the inflation that elections could be won and lost, and that is the inflation that the government wants to reduce to keep wage and pension and other indexed costs down.

There is no point in targeting some theoretical core-inflation number that only the boffins in a central bank can detect through their complex algorithms.

Of course a monetary authority can use the core-inflation index to make decisions on when, and what action to take, in order target the CPI inflation, just like watching industrial growth, the external sector, labour markets and so on.

The case in the US is slightly different because there is no explicit inflation targeting framework in place. It is also true that the Fed now uses core-inflation in its reports to Congress (a core based on the Personal Consumption Expenditure Index since 2000).

But then there is a whole can of worms behind this whole index issue in the US - particularly headline inflation numbers.

Index Manipulation

The attempts by Sri Lanka's economic policy mandarins and the Department of Census and Statistics to manipulate the CCPI seem amateurish compared to what the US authorities have done to their CPI to understate inflation.

This is done to save index linked payments of the US government, such as wages, pensions, Medicare and interest costs – (not just US Treasury Inflation Protected Securities but bond buyers also demand yields based on market expectations of inflation).

One tenth of an index point represents billions upon billions of dollars in costs or savings to the US government.

So they set about manipulating the index. This goes beyond mixing a bit of commercial food prices with home produced foods.

The BLS introduced 'geometric weighting', where the weighting of the fastest rising goods and services are reduced or taken off altogether!

If beef prices are rising for example, it is taken off and substituted with a cheaper alternative (say chicken) on the principle that people will switch to a cheaper close substitute.

All well and good, but critics point out that this actually represents a lowering of living standards as a result of inflation, and violating the basic principle of constructing an index, by changing the basket.

Then there is 'hedonic regression'. That is to say that when the quality of a good increases - say a computer's clock speed goes up - its price increase is ignored because it now give us more 'pleasure'.

But critics point out that the reverse is not done, when the quality of a good decreases!

Most of this was the work of Micheal Boskin (government) and Alan Greenspan (Fed) both of whom had vested interests in showing lower inflation.

All this makes CPI a joke according to critics in the US who estimate that headline inflation is understated between 0.3 – 0.5 percent a year now compared to how it was measured two decades ago. That is why they also point out that USA is now having high growth rates, through a lower GDP deflator.

If their inflation was so right how did an asset bubble develop in the nineteen 1990's? And how come the dollar is sliding against the Euro?

Funnily enough in February 2007 US CPI was 2.4 percent while the core inflation was 2.7 percent! The core number has been higher for some months with energy prices easing.

If core-PCE inflation continues to be higher than headline inflation for a long time you can expect the Fed to focus on some other 'more convenient' inflation index.

Having said that US inflation is quite low whatever the manipulation, so people do not get hurt too much, and they do have high living standards.

But if there is some catastrophe in the future and the dollar continues to slide against the Euro (the European Central Bank influenced by the likes of anti-money printing Germans are likely not to meddle with indices as much as the US) there may be a congressional inquiry and this whole system may be overhauled in the future.

You can now clearly see that the criticism of the Sri Lankan CCPI is political because all the official accusations claim that it has an upward bias.

No government ever says that an index has a downward bias and tries to revise it upwards.

That is only said by us poor non-technical chickens who go the market with our dwindling real salaries and find that we cannot feed our hungry families three months after the government prints tens of billions of rupees to finance a people-friendly budget deficit.

Postscript___________________________

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READER COMMENT(S)
28. sriyantha bandara Jun 10
I think this is one of the good web sites in sri lanka.
27. malaka Jun 05
Thanks a lot
26. fuss-budget May 26
Dear Aththa,

"Inflation is Always and Everywhere a Monetary Phenomenon," this was not said by fuss-budget but by Milton Friedman. However let's leave that aside for a moment.

Inflation and depreciation are two sides of the same coin. You need depreciation to reduce the negative effects of domestic inflation which pushes up the cost of local producers.

Essentially depreciation takes away the unfair advantages given to foreign producers by money printing and does not necessarily 'protect' local producers.

Protection implies that poor consumers will have to pay more to make the local businessmen fat. Here we are simply talking about restoring the status quo and not giving a subsidy to fat businessmen to make a high cost products and fleece the poor.

India and China protected the local economy for about half a century causing poverty and famines in some cases.

In 1991 India threw the economy open to 'dastardly capitalists' and dismantled the license raj. At the same time because of a severe balance of payments crisis, India brought laws to curtail money printing to finance fiscal deficits.

China threw itself open starting 1979. Unlike India which shifted from a currency board under the British (low inflation) to Reserve Bank of India, (just like Sri Lanka did to start a central bank in 1951) China had some unhappy experiences with money printing.

Being under the British we never knew what protected the currency and simply jumped into a central bank. Both Royalist and Red sides in China had bad experiences. As a result both China and later Taiwan were much more careful about money printing.

The 'solution' of course is the currency board which all small countries that became financial centres have adopted. Singapore, Hong Kong, Panama etc which have zero to one percent inflation.

However currency boards per se do not help if the budget deficit is chronic and profligate, as the experience with Argentina shows.

So yes 'the solution' is to cut the budget deficit, and stop defrauding the poor people by printing money.

Regarding JRJ

Our industries started to aggressively compete abroad only when the economy was opened by JRJ. Similarly the Indo-Lanka free trade arrangement has spurred a host of efficient industries including Damro who can even give Indians a run for their money.

Massive numbers of jobs have also been created since 1977. The liberalization under Chandrika also transformed the economy so radically that you are now responding to a web based news portal via a computer using telephone links from a post-privatized telecom sector.

I have no quarrel with JRJ for opening the economy - only for printing money and driving inflation up and reducing returns to labour.

Which is you and me and the streetcleaner.

Fuss-budget

25. aththa May 26
Money printing isnt the only thing that contrubutes to inflation, im sure u knew that.

On the broad stroke, you either have inflation or a depreciation of our currency due to our over reliance on imports...however you seem to be arguing against both, care to provide a solution?

SL requires an increase in the cost of imports that will allow for a sustainable local economy to develop.

Yes, that will mean, like india, like china or most of the developed world a century ago, we need to protect the local economy until it is competitive enough to sustain itself, painful but necessary.

So think again if you want to thank JRJ for adopting the open-market policy, when our local industries were merely budding.

24. TheEconomist May 16
All power to Fuss.
23. nm perera May 09
Only words nothing significant.

Writer wasting our time

22. harsha de silva Apr 25
Sittingnut
you are right 7.4% is real growth of gdp after adjusting for inflation by the deflator; something that has no relavence to you, me or mr cabraal.

what you and i and mr cabraal feel is consumer inflation which hit 20.5% in january, not the annual average inflation which is the percentage change between the average of the last 12 months inflation and the previous 12 months [that is 13 to 24 months backwards].

what the housewife feels at the market is the increase in prices of her basket from the last month or last year;not some complex average. i am sure you've heard people say "oh my gosh, last year this same bottle of sauce cost 25 rupees less".

that is point i was making; what mr cabraal says vs. what peope feel. sorry that you seem to be fixated with some theory that is irrelevent in this context.

21. Sena Apr 23
Thats some good info DDM. Will be interesting to see new basket vs. old basket and the weightage
20. ddm Apr 20
Sittingnut, I agree that the growth can not entirely be attributed to the deficit spending (though it is likely to have played a role), but I also don't think that this level of growth is sustainable.

If we look at the breakdown of the contributors to growth in '06, the major contributors are electricity (20.2% growth), construction (8%), telecom (13.1% including transport) and finance (9.7%).

Now electricity grew bc of the good rainfall helping with hydro-electric generation, construction growth I suspect has a lot to do with tsunami reconstruction, and telecom can not grow forever either. Some of the major components of GDP, manufacturing, retail and tourism and agriculture grew at the average rates of around 5%.

Therefore whilst the 7.4% growth is encouraging, I don't think there has been any underlying economic change (certainly not policywise) that has shifted us from our average 5% growth path.

We must also remember that deficit spending will contribute to increases in consumption which is obviously going to drive growth but won't be captured in most GDP stats. I personally am not overexcited about last year's growth performance.

19. sittingnut Apr 20
Mr harsha de silva's claim that "economy grew in 2006 is because of all the deficit spending (including massive commissions and markups)" is a mere statement without foundation. may be he or fuss_budget should write an article to lbo with the details to back that claim .

then we can examine its validity in detail.

"true the economy grew in real terms by 7.4%, but inflation hit 20.5%." to clarify, 'real terms' means after reducing the effects of inflation. that statement of harsha de silva is itself an abuse of statistics for proving a point. 20.5% is the point to point inflation in december, while average 12 month moving average is lower.

As an economist he should know why point to point average though useful should not be used in such a statement (esp since he implicitly couples that with real growth rate for the whole year, for some unknown reason ).

fuss_budget says "The new index is very unfair for workers and they had better know this before it is foisted upon them"

sri lanka's unions are not fools who allow such potential disadvantages to be foisted upon them. they already stopped an earlier attempt some time ago.

in any case, as i said, this new index is in early stages and it will take a long time to be accepted, so that even an attempt can be made to use it for salary indexing. this attack is way premature and unnecessary.

18. Sena Apr 17
Kanishke you have two indexes the SLCPI and CCPI and both show similar rates of change in inflation.

Its fair you feel that index needs to include a different 'basket of goods'.

However, you have a govt. that has been rated internationally as one of the most corrupt and most non-transparent.

Are you confident that the new basket will be fair for alll ?

Because they can have a "pro-poor" basket, and most of the goods in this could be helped by price controls and subsidies.

Then the reflecting index obviously wouldn't show accurate inflation. And who pays for the subsidies?

People who work hard and try to make money for themselves, instead of sitting on that butts expecting govt. concessions every day.

17. fuss-budget Apr 16
Hi Kanishke,
If you first work out why the index has to be changed then you will have your answer.

If you want the 'actual' inflation, then the 'actual' inflation is monetary inflation. As you can see for yourself CCPI follows money printing even more closely than SLCPI.

If you want an index to reflect the personal consumption expenditure pattern of an average Sri Lankan you already have the SLCPI, which has 80 percent of the of the spenders. That also closely follows CCPI, which again shows that CCPI is a pretty accurate proxy for the country given the fact that it only has data collection points confined to Colombo.

To quote the census department: "The department continues to publish SLCPI, covering the whole island (except North & East) based on the consumption pattern of lowest 80 percent of the households. It can be used to measure the average change in price levels such as inflation."

This is not fuss-budget speaking; this is Madam Statistics herself, innocent thing that she is. So then why do you need another index? The answer is that the political establishment is not happy with the results of the new index, so the statisticians have been asked to go back to the drawing board because there is perceived upward bias.

If you want to index wages, then SLCPI index clearly cannot be used, because you need an index of lower level workers. Remember 25 percent of Sri Lankan households are below the poverty line, about 40 percent earn below two dollars a day and so on.

Another reason SLCPI is not used to index wages is because there is a delay in computing it and you cannot hold wages for two months pending its release. If you want to index wages of workers you cannot have an index 'to represent lower & upper middle class' as intended by the census department in the new index.

The basic question is one of social justice. (See the answer given to Sittingnut and use of CPI-W in the US) This is not simply a technical issue. A lower and upper middle class index should not be used to index wages. It is morally wrong.

People who print money and run governments (i.e large budget deficits) throughout monetary history have defrauded the working classes, and favoured business and land-owners. It is automatic and inevitable.

You should not compound the felony of budget deficits by removing what protections that already exist in the economy to prevent the lifeblood of the working classes from being sucked up by politicians.

It is not really a question of whether it is Mahinda Chinthanya or not, though its effects on the economy, the rupee, people's wages and pensions are quite evident already. (See what Harsha has said about real wages of people).

When this columnist says 'politics' it encompasses the establishment in general. The problem with the index is not technical. SLCPI has already solved the technical problem. The problem is the upward bias, which is political in nature. Whether it is the United States, Zimbabwe or Sri Lanka does not matter either. The same thing happened in the US. First stories were planted in the media that there was something wrong with the index.

The after the population was suitably 'softened up' the Boskin commission came up with the 'geometrical weights' and 'hedonics', and what not.

These are standard tactics used in monetary history. There is no point in falling for it. From the point of view of the poor it is better to have an index that is sensitive to monetary inflation and push the government to have better fiscal (and monetary) policy.

That way the poor will be protected and our country will prosper and become strong. There is no point is self delusion. The strongest evidence comes from 2003. From January 2003 to March 2004 both these indices fell in absolute terms. Inflation was below zero.

That shows that the indices respond to fiscal discipline and complementary monetary policy. So where is the upward bias?

fuss

16. Kanishke Mannakkara Apr 16
Fuss, so do you propose to keep the inflation index as it is today?

I think there is a serious problem with that. The weights of goods in the current index simply do not reflect the allocation of funds out of the average Sri Lankan's budget. This needs to be changed in order to give a true indication of inflation.

Forget about the political reasons behind the decision to do so, the bottom line is that the index must be changed.

I do realise that as long as money printing continues, there will be high inflation regardless of the composition of the index, but that is not the point. At the end of the day, we need to know what the actual inflation in this country is, and with the current index, we do not know this.

Everybody is getting too distracted by Mahinda Chintanaya to think rationally about whether the imposition of a new inflation index for Sri Lanka is a good thing or a bad thing. I believe that it is most definitely a good thing, and that the arguments against it are very weak indeed.

Kanishke

15. fuss-budget Apr 14
Sittingnut The new index is very unfair for workers and they had better know this before it is foisted upon them.

The reason that CCPI seems to follow monetary conditions so amazingly closely is probably (I say probably) because;

(a) it has a larger proportion of items (goods) which respond quickly to demand conditions and lesser proportion such as rents (services) for which there is a lag. In the new index for example rents are likely to have double the weight from 5.7% to 11.4%.

(b) it has been started in an age of innocence where the old basics of constructing a CPI which is fixed basket of an urban households that represents a target population has been followed.

But that is not the really bad thing about it. The bad thing about the new index is that it is going to represent the 'lower and upper middle class' and that is going to hurt factory workers and the like who are the people who really needs a COLA adjustment because their disposable income is low.

Even that dastardly capitalist country the United States of America, where the poor down-trodden factory worker owns a car, has a low interest housing mortgage, a television with cable (possibly with Tivo) a fridge, a computer with internet etc etc., CPI-W (bottom 32%) is used to index wages.

A CPI-U with all urban workers including professionals is also calculated in the US but it is not used to index wages of other workers.

But here we are trying to get 'middle and upper middle class' household consumption pattern to index wages of factory workers and so on.

Forget about the technicalities, there is no justice in this.

Fuss-budget

14. harsha de silva Apr 14
The reason why the economy grew in 2006 is because of all the deficit spending (including massive commissions and markups), i.e., demand driven growth, ala keynesian type government expenditure. mahinda spends, cabraal prints to pay the bills!

true the economy grew in real terms by 7.4%, but inflation hit 20.5%. note that while they looked after the bloated public sector in the face of high inflation (wages grew in real terms by 15%); they let the others drown (wages DECLINED in real terms by 11%, 12% and 12% for those in wages boards in agriculture, inductry and services).

also note that growth declined in every quater (from the previous quarter) in 2006; 8.2, 7.4. 7.1, 6.2 (or something like that, forgot the exact numbers). it is unlikely we can meet Mr Cabraal's 8% target next year.

harsha

13. Kapila Apr 13
Point taken on inflation.

I always thought the EPF return was the biggest rip off.

Cheers. Kapila

12. fuss Apr 13
Hi kapila,

Yes it is always better to add to the basket, but that does not necessarily get you a better inflation number (i.e. monetary inflation). At a guess adding telephone costs may tend to moderate the index over the longer term.

That is why i said there are a lot of forces out their driving prices down. So the reason we still have inflation is that the government is making sure that enough money is printed to skim those benefits off.

Assume if you put telephones in the index, and if telephone costs fell (like mobiles) and that drove the index down by say 3 percent.

Then suppose Sri Lanka had an inflation target of 2 percent?

What will happen is that it will allow the goverment to print money to create 5 percent monetary inflation and still show a 2 percent headline inflation number.

fuss

11. sittingnut Apr 13
I hope you are not implying there wasn't high growth last year. i don't think even fuss budget will go that far. if you do, it would make rational debate impossible. so do be clear.

Since you ask, i did feel the effect of the growth personally. most ppl who produce goods and render services did.

7+% growth is the real growth calculated after taking account of inflation, not the nominal growth . you seem to be bit confused about that point.

on the other hand if you are merely saying that benefits of growth do not accrue to everybody and that ppl whose wealth is in cash got their nett worth reduced that is valid. i never said there wasn't high inflation or that it was a good thing.

but as i said before attacking an index that will take years to accepted as the standard (as fuss budget should have known) and calling it a gimmick is way too to premature.

10. Sena Apr 13
Sittingnut what components of growth have you enjoyed? Whats the point of this growth anyway? If you've earned an hoenst living, haven't made a commision on a govt deal or won the lottery you're poorer now than last year because you wealth apprecaited by the interest rate where your money is parked while inflation eroded that so you're left with a net deprecation in your wealth.

Is electricity cheaper? or better service? how many power cuts do we have compared to other comparable countries?? is fuel cheaper? Are you saving more moeny? can you buy more land? Can are you confident that kids in 15 years time will enjoy a better standard of education in the local universities? Or a better standard of living?

With inflation growthing faster than GDP growth since the Chinthanaya, growth is just a virtual number.

Inflation to an economy is like fever to the human body. Both are symptoms. You can 'control prices' the way you can control temperature with ice. But to get better you need medicine.

Changing the index is like using an copper thermometer instead of a mercury one. How many times do you need to keep changing the index?

The point of the article is also the morality thats related to this. Changing the index is not wrong on its own. But changing it during times of high inflation is a "gimmick".

IF you replace the index what truth is left in the economy? CBSL's governer is a president's appointee his organization determines GDP rates, the treasury comes under the MOF which is a chinthanaya ministry now, and with a politically determined inflation index - thats the ultimate hoodwink.

So successive governments have can keep getting away with this coz they keep the average level of ingnorance safely air-tight.

If you allow a better quality of english in schools and wider access to global media (example, thru the web) then people can see whats happening overseas and compare with whats happening here and say "wait a minute, i think we're being taken for a ride!!!"

The reason politicians can get away with shennanigans is coz the average voter doesn't understand the implications of it, so best to keep the voter base poor and ignorant.

9. kapila Apr 13
While I agree with you the main reason the government is trying to change the index is for political reasons I strongly disagree with the concept that the index should not be reviewed to better reflect the change in purchasing patterns in the economy.

My understanding (not a professional economist so I stand to be corrected) is the CCPI basket does not have an adequate weighting for services such as communication services etc.

I also understand the weighting of the particular basket of goods also does not reflect actual consumption today.

Based on this it would be a good idea to critically analyze both the composition and the weighting for individual components of the index.

Cheers

Kapila

8. Apr 13
Can an independent credible body create a realistic index for low, mid, lower mid, etc which can be linked to LBO etc for transperancy. - conrad
7. sittingnut Apr 11
Was the index changed? no was a new index proposed ? yes

Will it take several years and lots of data to be accepted ? yes

will it be substituted for wage indexing etc. ? unlikely as long as there are public sector unions and it shows markedly lower inflation.

so this article is attacking a non existent ghost way to early. may be writer is unhappy that sri lanka had the highest growth for two decades last year and wanted to attack 'something' .

6. Lenville Apr 11
This article really interests an economics ignoramous like me. I am not one who is usually keen to know of the complexities of economics and it's workings, but this one certainly got me going.

This article gives people like us a good insight of things we really should know.

We are being taken for suckers by governments, who continually think the ignorant masses could be fooled all the time by them painting a rosy picture flouting and manipulating the basic laws of economics, but when basic instinct tells the poor man they have to tighten their belts (if they can afford one), these pundits will look idiots.

Thanks again for the insights and please keep it going, Fuss...well done

5. Niroshan Apr 11
As a non-economist (I am a Chartered Accountant and I like to stick to what I do best), it is always a pleasure to read your articles and have all the doubts confirmed.

Keep up the good work!

4. ajantha Apr 11
Kanishke,

The point raised in the article is that the basket does not seem to matter too much if the inflation is primarily monetary.

The point is made that despite the criticism both CCPI and SLCPI (and having different baskets) both seems to show almost the same inflation.

Fuss, i should tell you the same thing that Paul Samuelson reportedly told John Exter about some BOP crisis which i read some time ago.

'You may be right, but you are lonely."

3. Leon Emmanuel Apr 11
It's a pity that this superb article has only internet readers.

It should be given the widest possible coverage and exposure.

2. harsha de silva Apr 11
Fuss

Yet another brilliant piece! Mr Cabraal should not be allowed to walk all over the people of this country.

After making all of us poorer by 20 percent last year and on the way to replaying that feat this year attepmts are now being made to manipulate the inflation index to hide the enormity of the robbery committed.

What is really saddening to see is how the members of this economic policy committee are wilting to the pressure.

Why cant the so called top academics there who’ve been teaching economics for decades stand up against the nonsense .

fuss, you have shown with amazing accuracy and in a fairly understandable way [to the non economists] the relationship between inflation and money printing.

It is very clear in your graph how CBSL, under jayawardene and supported by people like wijewardene was able to bring inflation using the current index to below 5 percent!!

In fact the year-on-year number even went down to zero during the low.

Like someone once said, you might be able to fool some of people all the time or all the people some of the time, but not all the people all of the time.

In fact I have invited Mr Cabraal to come on my show 'biz 1st in focus' but he has turned down the requests.

Our show this friday 13th at 9:35 pm is on his annual report.

I have a brave university professor, a true professional who is not scared to speak the truth discuss mr cabraal's achievements over the last year. [i hope lbo will not remove the small plug; doing it as it is of interest to the topic!]

fuss, i wish you the best. you are maiking a huge difference; keep it up!

harsha de silva

1. Kanishke Mannakkara Apr 11
Leaving aside the upward or downward bias of the index, I think everybody agrees that it is incorrect; it is incorrect because it does not reflect the relative price of a basket of goods procured by the average consumer in this country.

I think it is therefore a no brainer that the index should be changed.

Besides, perceived inflation feeds to inflation, so why help something that is essentially bad for the competitiveness of the economy?