ECONOMYNEXT – Sri Lanka’s 12-month consumer prices deflated 4.0 percent in December 2024, with the widely watched Colombo Consumer Price Index rising 0.5 percent, data from the state statistics office showed.
The CCPI at 192.6 points is now around levels seen in April 2023.
Sri Lanka’s central bank has run largely deflationary policy (mopping up inflows in the context of pegged exchange rate) since late 2022, and its effects started showing up in the balance payments from September 2022, abruptly bringing index inflation to halt.
The central bank also allowed the exchange rate to appreciate from around 360 to 300 amid deflationary policy, helping bring down prices of traded goods, fuel and electricity, even as services prices caught up.
Stability for growth
As a result, inflation has only risen 1.7 percent since September 2022.
Sri Lanka’s economic activities have strongly recovered and people’s salaries are slowly starting to levels seen before the central bank mis-targeted rates with inflationary direct and open market operations.
In the second half of 2024, quarterly inflation has been below the 2 percent lower floor of the central bank’s 5 percent inflation target.
The US Fed has also generally run deflationary policy, reducing excess liquidity, helping keep commodity prices, including coal down.
Bad Anchor Inflation Apartheid
Sri Lanka’s inflation is now around developed country levels, which were last seen before 1978 when the country lost a credible anchor for money.
Since then the country has been running various third rate anchors peddled by Western Mercantilist, inflationists involving anchor conflicts. These included competitive exchange rates (basket band crawl) and money supply targeting without a clean float.
Sri Lanka defaulted in 2022, in peacetime after three consecutive currency crises, over about a decade trying to operate inflation targeting at a 5 percent, without a clean float.
Under ‘interest rates as a last line of defence’, the rupee was steeply depreciated after cutting rates under ‘flexible inflation targeting’.
The current stability and strong growth is coming with the central bank undershooting its target.
Sri Lanka central bank ‘exceptionally great’ in achieving deflation: legislator
Opposition legislator Kabir Hashim, a critic of the high cost of living target, which had driven millions to work in stable countries without anchor conflicts (hard pegs or inflation targets around 2-3 percent) said the central bank’s recent performance in missing target was ‘exceptionally great’.
(Colombo/Jan31/2025)
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