Sri Lanka to dip into deflation by mid 2009

April 18, 2009 (LBO) – Sri Lanka’s inflation will dip below zero briefly by the middle of 2009, the island’s central bank governor Nivard Cabraal said as the world is gripped by a classic deflationary collapse.

During the great depression, when the dollar strengthened and people pulled money out of banks to bury in their backyards, inflation fell as much as 10 percent a year.

Sri Lanka’s price index has fallen on absolute terms for six straight months since October, indicating deflationary conditions with the index falling from 207.2 points to 202.0 points.

In 2004 January the 12-month CCPI index hit 0.5 percent, the lowest in recent years.

In the same period a country-wide measure, the Sri Lanka price index (SLCPI) dipped below zero to a negative 0.9 percent in January 2004 and remained at a negative 0.2 percent till February before moving to positive territory.

The index was suppressed by Sri Lanka’s statistics office when inflation rose to record levels in the early part of 2008, partly due to US inflation coming through a dollar peg.

Absolute falls in the index for long periods or deflation is rare in the modern paper money central banking era which focuses on generating a low