Decline Inflation amidst COVID-19

Decline Inflation amidst COVID-19

3 June 2020 06:04 pm

Vincent Mervyn Fernando
Former director of the Central bank of Sri Lanka, veteran Economic Analyst

On May, 2020, the Rate of Inflation marked at 4.7% in the Colombo Consumer Price Index (CCPI) on an average annual basis, a lesser value compared to that of April, which was 4.8%. The headline inflation, as measured by the year on  year  change in the colombo consumer price index (CCPI) was to 4.0% in May 2020 from 5.2% in April 2020. Accordingly  to the National Consumer Price Index (NCPI), the rate of inflation on April (the rate for May is yet to be calculated) marked at 5.9%, a significant drop compared to that of March, which was 7%. The drop was from 13% to 10% in food and 2.1% to 1.6% in non-food items.

Inflation in a country defines the situation in which the general price level of the state (average price of all goods and services) is being continuously risen.

This increase takes place under two ways. One, it could rise due to the Aggregate Demand of a country. This is called the Demand Pull Inflation, through which the money is increased summing cash among people, and the demand for goods and services is increased. By the time Covid-19 existed in May, 2020, the demand for fish, lentils and rice among people rose, due to which the prices also soared. Similarly, prices of sub category items - namely non-food items such as transport and various goods and services - also rose. The CBSL measures the inflation that is occurred amidst the increased demand by "Core Inflation." This is being measured based on the difference of prices of five items (energy and food items) from the .headline inflation  (the inflation determined by both supply and demand). On May, 2020, the Core Inflation of economy dropped down to 2.9%. On April, it was 3.1%. The annual average basic inflation on May, 2020 dropped down to 4.4% and on April, it was 4.7%.

Inflation in a country is also influenced by the Cost Push, and the inflation recorded amidst Covid-19 also indicated its impact. The drop of domestic production in the middle and the decline in import demand required for production of goods also affected it. However, the inflation is being well controlled against the impact of the Covid-19 Pandemic by the CBSL as the prime responsible body.

Before Covid-19, people of this country suffered from a Double Digit Inflation for nearly 20 years in the occurrence of the 3-decade war. In 1980, the country had marked the highest inflation in history since independence, 26%. From then on, the inflation had consecutively marked at 18%, 11%, 14% and 17% until 1984. Again in the 6-year period of 1984 - 1994 it had consecutively marked at 14%, 12%, 22%, 12%, 11%, and 12%, tormenting the public in terms of cost of living.  During the first period of Mr. Mahinda Rajapaksa since he assumed Office in 2005, the inflation had consecutively marked in the four-year period of 2005 - 2008 at 11%, 10%, 16% and 23%, a double digit inflation, solely influenced by war. Coincided with ending the war by President Mahinda and the Defence Secretary in 2009, the then governor of CBSL, Mr. Ajith Nivard Cabraal, had initiated the CBSL's top priority of establishing Price Stability. Accordingly, the CBSL was able to maintain the inflation in a single middle digit, from 2009 to the present during which Covid-19 occurred, and they were also able increase the economic growth rate consecutively up to 8%, 8.4% and 9.5% in 2010, 2011 and 2012. However, the downturn of economic growth was quite significant since 2015 (See Table below).
Price and Economic Stability of Sri Lanka May 2009-2020

Year Inflation Rate (%) Growth Rate (%)
2009 3.5 3.5
2010 6.2 8.0
2011 6.7 8.4
2012 7.6 9.1
2013 6.9 3.4
2014 3.3 5.0
2015 2.2 5.0
2016 4.0 4.5
2017 6.6 3.6
2018 4.3 3.3
2019 4.3 2.3
2020 4.7 -

The above table indicates that although the CBSL had the capacity to stabilize the economy and the prices post war, the economic stability had failed since 2015, despite the price stability. In the meantime, although the CBSL was able to maintain the price stability at around 4%-6% under the Flexible Inflation Targeting Program amidst the Covid-19 Pandemic veiled across Sri Lanka, the weakening of the foreign sector of the country's economy (Tourism, Apparel, Foreign Remittances, Imports), the significant drop of Public Sector (drop in public tax revenue, increase in public expenditure, difficulty to obtain public debt), the meltdown of the Business Sector and the loss of macroeconomic factors, such as the income of the household, have weakened the economic stability (economic meltdown). In definition of this status, we can add the term 'Inflationary Downturn of Economy' to the Economics.