Is A Little Bit Of Inflation Necessary For Economic Growth?
Dr. W.A. Wijewardena
Principles of Central Banking 13: Is a little bit of inflation necessary for economic growth?
Reduced inflation rate means still more expenditure by consumers
Sri Lanka’s General Price Level, as measured by the Colombo Consumers’ Price Index, commonly known as CCPI, and compiled by the Department of Census and Statistics, is reported to have increased as at end of January 2014 by 4.4% over the price level that had prevailed one year ago. In December 2013, this annual increase in the price level had been 4.7% and therefore, there has been a decline in the rate of growth. This has been the trend which CCPI had shown since February last year when the annual rate of growth in the price level stood at close to 10%. When the change in the CCPI is considered over the last twelve months, the rate of growth at the end of each month over the respective level as at one year ago has continuously declined though CCPI has continued to increase from month to month in most of the period. Thus, CCPI which stood at 170.0 in January 2013 has increased to 177.5 in January 2014. An increase in each one point in the index costs the consumers Rs 279.72 more. Therefore, the increase in CCPI in the previous 12 month period by 7.5 points will cost the consumers Rs 2079.90 more to buy the same basket of consumer goods today. Unless their income has gone up by that cost, their position has certainly deteriorated. This increase in costs is reckoned by many as ‘a little bit of inflation’ which is necessary for an economy to ensure continued economic growth. For instance, the Central Bank of Sri Lanka or CBSL has expressed its satisfaction about the low rate of inflation and gone onto relaxing its monetary policy in a few rounds of policy relaxations to promote, as the Bank has claimed, economic growth.
