Cost of living: Glass half empty or full?

Ask the common man and he will confirm that the cost of living has risen and is continuing to rise, certainly not reducing!

However, Central Bank will have a theoretical comment – the level of increase is declining or moderating. The past four months have been point to point increase in key inflation index to a high of 17% range while the actual increase in the cost of goods and services could be higher. A case in point is last week’s price hike in LPG to 20%. The layman and even certain politicians cite reasons such as the high expenditure on war, devaluation of the rupee as reasons for high inflation while other factors include the high budget deficit, rise in fuel prices, expansion in money supply due to heavy bank borrowing by both private and public sector, high interest rates, supply and demand reasons, as well as increase in public sector salaries early this year. Economists also point to overall mismanagement of the economy, fiscal and monetary policy.

Nevertheless, the Central Bank yesterday said the Colombo Consumers’ Price Index (CCPI) declined by 0.8 per cent in August 2007 compared to July 2007, conforming to the seasonal pattern generally observed during this month. On a point to point basis, the index registered a 17.3 per cent increase in August, as against the 17.6 per cent recorded in the previous month.

The improvement in the supply condition of many agricultural commodities, especially vegetables, due to the arrival of the Yala harvest contributed to this decline. The temporary removal and lowering of taxes on certain essential food imports too helped the decline in prices. However, the price of rice had risen during the month, being the inter harvest season, which is expected to reverse from the next month with the onset of the Yala harvest. “The general price level is expected to revert to its decelerating trend observed in recent months, responding to the tight monetary policy stance of the Central Bank,” it said in a statement.

High credit growth
The reserve money reached Rs 257.1 billion by end August, while the monthly average was Rs 254.7 billion. This is below the September target, of Rs 257.8 billion, which could be achieved as a consequence of the continuation of the Central Bank’s tight monetary policy. The growth rate in broad money supply is also expected to fall, following the decelerating trend in reserve money. As per June 2007 data, the growth in broad money was somewhat higher than the expected level due to high domestic credit in commercial banks. Though the credit to private sector is still growing at a higher rate, it indicated a decelerating trend during the last three consecutive months. The credit growth in pubic sector is also high, but expected to decelerate. Accordingly, the expansion in broad money supply is expected to decline in the near future.