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Sri Lanka to change price index basket next year
19 Dec, 2009 10:17:38
Dec 19, 2009 (LBO) - Sri Lanka will change the basket of goods in its most widely watched price index from next year and re-base it to reflect consumption patterns of a newer survey, an official said.
Sri Lanka's current revised Colombo Consumer Price Index (CCPI) is based on a household consumption survey based in 2002.

The new index to be released in February next year will be based on a 2006/2007 consumption survey, head of price indices at Sri Lanka's statistics office D C A Gunawardena said.

Discredited Index

The index has drawn widespread criticism as an attempt to understate inflation.

The index has dropped alcohol and tobacco from a standard consumption basket under the COICOP (Classification of Individual Consumption According to Purpose) standard the statistics office claims to follow.

Gunawardena said there were no plans as yet to include alcohol and tobacco in the index when it is revised next year.

Critics have said the ad hoc process surrounding the introduction of the index is symptomatic of Sri Lanka's problems of state-centric arbitrary government and lack of true democracy or rule of law for the people.

The revised index itself was made 'official' suddenly at the height of an inflation bubble in April 2008, when consumer prices hit 29.9 percent under an older index, the highest ever.

Bad Governance

Changing consumption baskets in the middle of high inflation bubbles is a sign of bad governance and money printing governments.

Zimbabwe's Central Statistics Office also stopped its index in the previous year after reporting 3,750 percent inflation in April.

Sri Lanka's statistics office also stopped a countrywide price index saying the numbers were 'politicized', though Sri Lanka is not a one party state yet but a multi-party democracy.

A Reuters news agency report on July 13, 2007 said Zimbabwe's statistics office was working on a one year survey to find out whether the data was "an accurate reflection of the situation in Zimbabwe."

"That's just one aspect of what we're doing ... we are also coming up with a new basket. Both are a long way off and I'm reluctant to give a time frame," Moffat Nyoni, the acting director of the statistics office was quoted as saying by Reuters.

Less Arbitrary

Monetary economists, especially those who favour low inflation and the use of a gold standard to restrain the growth of the state with paper money supply expansion, say understating inflation is central to perpetuating inflationary state finance.

Before the first World War, major central banks always got back to the gold standard by deflating prices to the level seen before an inflationary bubble.

But especially after 1971, when the US dollar finally cut its last links with the gold, a 'little inflation' has been justified as 'necessary'.

Various methods have since been devised to understate inflation and no government has ever attempted to revise an index saying an index showed less than true inflation.

Frequent changes to the consumption basket are the most widely used tactic to understate inflation. People move to cheaper goods when inflation is high, a process described by critics in the United States as 'moving from beef to dog food.'

Gunawardena says the new index would be changed after the lapse of five years.

By introducing a fixed rule based period for re-basing the index (say five years), the arbitrary power of the state to manipulate the index at will could be reduced to some extent and a semblance of 'rule of law' could be brought back.

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2. NoStatAbuse Dec 21
It appears that authorities are bent on deceiving themselves by manipulating the index to show a low inflation which they believe to be a sign of their good performance. But it is not.

The current index has several grave defects.

1. The exclusion of alcohol and tobacco, an important consumption item in a typical consumer's basket on a spurious argument that the government has implemented a campaign to discourage its consumption;

2. The use of the controlled prices of items subject to price controls, such as rice, thinking that such items are available at the controlled prices to a typical consumer in unlimited quantities;

3. The use of a 'trimming process' under which prices of items of which a monthly increase is more than 5% are excluded on the argument that consumers would substitute other items for these items.

What is necessary is to have a clearly laid down policy of calculating the index. The Authorities should not have a role in deciding the system arbitrarily to suit their own private agendas.

The new governance that is required in the country needs to incorporate such a good policy package in the calculation of the index.

Otherwise, though the index shows a low growth, inflation expectations continue to remain high forcing people to ask for high nominal returns.

1. Dec 20
Never believe in statistics put out by a state sponsored organization, whoever rules the country. Either these organizations are compelled by the Government to publish bogus figures to avoid bad publicity or some officials looked after by government will be instrumental in suppressing the true figures.

We need a private independent organization to publish the important figures such as COL index, inflation, growth indices, etc if we are not going to be a banana republic.