Deflated consumer index

The government this week announced a new Consumer Prices’ Index and like anything new it triggered negative comments from the opposition essentially on the timing of its introduction.

It is inevitable that in Sri Lanka any new proposal or tax is viewed with suspicion or dismay by most sections of the population – even before it is put to the test. In this case, the opposition United National Party (UNP), according to some reports, criticised the timing of the new index because the rate of inflation is lower than the old, outdated index.

In this case however the criticism appears to be warranted. For example how can a new index measuring inflation taking current prices and needs into account show a lower rate of inflation compared to the old index which was based on an outdated 1952 basket of goods? It doesn’t make sense even if one is to discount the UNP argument as a political response rather than a practical one.

Annual inflation, according to the new index, was 17 percent last month against 19 percent under the old CCPI (Colombo Consumers Price Index). Officials say the new Colombo Consumer Price Index (CCPI) by the Department of Census and Statistics (DCS) will reflect more accurately inflation levels in Sri Lanka. DCS Director D.C.A. Gunawardena says under the old index electricity was weighted very low and kerosene was weighted very high, not a true reflection of current household consumption patterns where kerosene consumption is much lower than electricity and gas. Some of the new items in the new index include water, electricity, telephone charges, mobile phone charges and rent.

Gunawardene agrees that under the point to point index, the inflation figure is higher but says the department prefers to use the 12-month moving average.

As far as the criticism is concerned, some analysts point out that with a crucial budget vote due on December 14 which could make or break the government, the lower rate of inflation is a political message that prices are falling – although in reality, inflation or no inflation, to the average consumer, prices of essential goods are soaring. There’s no doubt about that; there’s a vast gap between prices reflected in inflation measurements and prices on the street. Even Consumer Affairs Minister Bandula Gunawardene’s efforts to bring down prices vis-à-vis reduced duties on key food imports hasn’t worked – traders haven’t passed on the benefits to the consumer. The government needs the support of the JVP to win next week’s budget vote and, battle-field successes against the LTTE and a reflection of consumer prices coming down is the bait that’s been used to woo the JVP.

Inflation aside, the prognosis for the economy and consumer prices in the first quarter of 2008 is not very encouraging given expected international and local trends.

A report this week by the International Food Policy Research Institute (IFPRI) – widely reported in the world press – says food prices globally are seen rising even in countries like China. The IFPRI says rising prices will threaten the livelihoods and nutrition of poor people in developing countries.

"Surging demand for feed, food, and fuel have recently led to drastic price increases, which are not likely to fall in the foreseeable future, due to low stocks and slow-growing supplies of agricultural outputs. Climate change will also have a negative impact on food production, compounding the challenge of meeting global food demand, and potentially exacerbating hunger and malnutrition among the world's poorest people," the report said. What does this mean to Sri Lanka? Already agriculture production has fallen below target this year and it’s anybody’s guess – depending on the weather – as to output levels next year. There is also speculation of wide-scale corruption in fertilizer subsidies where farmers are selling their quotas and not cultivating because rice production is uneconomic. The Central Bank in a report this week also drew attention to the continuing higher oil and food commodity prices in international markets. Thus rising global food prices coupled with fuel prices here unlikely to fall in the near future, will result in a negative outlook for Sri Lanka. The investment climate in the stockmarket is also not rosy given the rising number of civilians killings by the LTTE and air strikes by Sri Lankan forces.

Therefore even if the latest ‘low’ inflation figures trotted out by the government are to be taken seriously, the outlook for the Sri Lankan economy early next year is not at all promising.