ECONOMYNEXT – Sri Lanka’s inflation in the capital Colombo was 5.7 percent in the 12-month to September, slowing from 6.0 in July, though prices rose 0.4 percent during the month, data from the state debt office showed.
Sri Lanka’s rupee is under severe pressure from liquidity injections which were not prevented by the Central Bank’s 4-6 percent inflation target.
The Colombo Consumer Price Index, the most widely watched price gauge rose from 143.4 points to 144.1 during the 30-days of September.
The food sub-index, which contains more traded commodities and is quickly influenced by currency depreciation and US monetary policy (weakening of the dollar) was up 10 percent over the 12 months.
The CCPI overall has a smaller food component and it has other items like, telecom, education and housing which may react more slowly.
The food index rose was up 22 percent over two years rising from 135.3 in September 2019 to 165.9 in 2021.
Sri Lanka’s central bank is targeting a 4-6 percent range of inflation on the overall CCPI which had led to currency crises in 2011/2012, 2015/2016, 2018 and there is on ongoing in 2020/2021.
The currency crises come from liquidity injections to keep rates down or target growth. They are then followed by output shocks when corrective measures done to stop the external sector from collapsing as the exchange rate falls or forex reserves are depleted.
“This is a problem seen also in India and other countries that that try to juggle two anchors and with an unstable flexible exchange rate, collecting forex reserves,” says EN’s economic columnist Bellwether.
“The Reserve Bank of India has quite good monetary stability and less anchor conflicts when they were targeting a Wholesale Price Index.
“The RBI lost its grip in the run up to the collapse of the Greenspan-Bernanke bubble in 2008/2009 and in 2014 the switched to a broader inflation index, losing the plot altogether. The Indian rupee has steadily collapsed since then.
“In contrast Bangladesh which targeting reserve money – which also has problems – has done much better.
“WPI targeting was devised by the reformers of the RBI after the 1991 economic collapse, who understood note-issue banking very well.
“Actually this idea dates back to Henry Thornton, in the bullionist debate in Britain. Thornton, like David Ricardo understood central banking very well, unlike later policy advisors like JM Keynes who focused on Mercantilism.”
Almost all successful inflating targeting central banks not only have a domestic anchor of around 2 percent but they also have a fully floating exchange rate with a non-convertible monetary base to avoid anchor conflicts.
Modern fiat money central banks target positive inflation in any case and policy errors are left uncorrected as ‘bygones’ unlike in a specie standard where periods of inflation are followed by periods of deflation, protecting the poor.
“Inflation is cumulative, and prices go up over time faster like the compound interest,” Bellwether says.
“That is why over two years the food index is up 22 percent. It is partly through ruses like this that bad central banking was perpetuated especially after World War II and is allowed to create social unrest.”
Under positive-inflation targeting policy errors are compounded unlike in the pre-World War II specie standard when periods of inflation was followed by periods of deflation reversing central bank policy errors. (Colombo/Sept29/2021)