SL’s true inflation hits 55% in March defying official figures

Sri Lanka’s true consumer price inflation is running in the north of 50 percent as the official index compiled by the Census and Statistics Department does not capture the time and income lost of scores of people who stand in queues everyday for fuel, cooking gas and milk powder. According to Steve Hanke, a classical American Economist, measured Sri Lanka’s consumer price inflation at 55 percent in the twelve months to March 24, up from 49 percent about a week ago. 

However, the official inflation was 15.1 percent in the twelve months to February 2022 as per the Colombo Consumer Price Index (CCPI), the officials’ preferred consumer price gauge. 

Hanke, who was a senior advisor to President Ronald Reagan’s Council of Economic Advisors from 1981 to 1982 which had to introduce sweeping measures such as steep rise in federal funds rate under the chairmanship of Paul Volcker at the United States Federal Reserve to fight the 1970s inflation was a vocal proponent of establishing a currency board to bring down Sri Lanka’s inflation. He this week doubled down on his prescription to set up a currency board, whose ability to print money is restricted by the amount of foreign currency reserves one has, so that it will not cause currency or Balance of Payment instability similar to what Sri Lanka is going through at present. 

“In this week’s inflation table, Sri Lanka is moving up the ranks. On Mar 24, I measured LKA›s inflation at a sky-high 55 percent/yr”, Hanke tweeted.

“To crush inflation and save the rupee, Sri Lanka needs to install a Currency Board, like the one it had from 1884 until 1950. It worked like a charm”, he added. 

Hanke’s inflation measurements take into account the loss of income one has to forgo while waiting in queues, which tantamount to his opportunity cost and thereby must be added to the packet of milk powder or the litre of diesel or the tank of cooking gas one purchases. 

This opportunity cost component is not measured and added to by the Census and Statistics Department’s official consumer price data. 

Meanwhile, the critics of Hanke’s argument to set up a currency board in place of the Central Bank says that Sri Lanka doesn’t at the moment have sufficient reserves to set up a currency board and as a result Sri Lanka could run into deep domestic liquidity shortages on top of dollar shortage if the country sets up a currency board now. 

“…if money supply increases at the same rate as real economic growth it is neutral on prices and hence on the external value of the rupee as well,” said the former Central Bank Deputy Governor, Dr. W.A. Wijewardena in his weekly column in our sister newspaper, Daily FT on Monday.

“But, if money increases over and above the real economic growth, known as excess money creation, it chases after goods and services pushing their prices up domestically and reducing the value of the rupee in the international markets. This is exactly what has happened to Sri Lanka,” he added.