Central Bank welcomes deflation to undo past run-away price effect  Deflation becomes a growth enabler as it sparks more demand as people spend more on more things

 The Central Bank shrugged off widespread concerns raised by many that the current deflation is going to be all bad. 

Instead, the CB said it sees the bright side of the not so good word in economics which has the ability to take away some of the harshest pains inflicted on larger swaths of the population in the country for nearly two years.
When asked repeatedly if the financial sector regulator is concerned, Central Bank Governor, Dr. Nandalal Weerasinghe said they consider it positively as long as it doesn’t affect the economy badly.

He said deflation here isn’t necessarily bad given the red-hot prices the country and its people had to go through which left some in hunger, others malnourished, and most others with widely stretched household and personal budgets.

Sri Lankans have seen months-long cooler prices before flipping into deflation in the last two months almost entirely due to the repeated cuts to prices in power and energy and the improved supply conditions that prevailed due to mostly favourable weather conditions, and also the soft global commodities prices as the economies returned to normality after prolonged pandemic and war related disruptions.

Central Bank erred in diagnosing what caused the inflation as they thought it was due to hotter demand and responded by raising rates through the roof and the government on the other side raised the taxes and the power and energy tariffs by multifold, sending the inflation to sky high levels, rendering the people destitute.

CBSL crushed production and thereby the supply, worsening what could well have been an episode of short term inflation which could have come down on its own, by trying to kill the demand which they thought was the root cause of Sri Lanka’s inflation, making one of the biggest blunders in economics of all time.

Now that the rates are being cut and the power and energy prices being revised down, inflation is too on its way down before turning negative from September 2024.

The Colombo Consumer Price Index fell 0.5 percent in the year through September 2024 and 0.8 percent in October.

Central Bank which initially thought this deflation to be a short term phenomena this week said would be deeper than expected and also longer than expected before turning positive from mid-2025 and gradually converging towards the target level of 5.0 percent in the medium term.

As prices are coming down, at least in energy and power and also in some other key commodities, people are now clawing back at least part of the purchasing power they lost in the last three years, regaining the ability to afford some of the goods and services which they were forced to forgo in the recent past.

This was seen in the recent corporate results which saw some robust growth in top-lines of the consumer discretionary and consumer durable companies in the September quarter, hence driving the growth in the economy.

Dr. Weerasinghe also said the current deflation is not a problem as it hasn’t weighed on the economic growth.
In fact they upgraded the full year economic growth forecast to between 4.5 to 5.0 percent in 2024.

Unlike in Japan which recently exited its more than 25-year battle with deflation which became a drag on growth, Sri Lanka’s is a positive story where the deflation supports growth as it helps people to spend rather than defer their spending after almost three years of postponing or giving up their spending due to the authorities’ demand destruction policies which ended up turning even the country’s politics upside down.