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Saturday, March 25, 2023

Local economists not taking ‘Hanke’ inflation seriously  – The Morning

Must read

  • Say Hanke does not consider local patterns
  • SL’s inflation calculation methods match many Central Banks, says Dr. Roshan Perera
  • Rehana Thowfeek says figures based on Purchasing Power Parity 
  • Hanke’s methods ‘a little strange’, claims Chayu Damsinghe


By Imesh Ranasinghe 

There is no need to panic over Steve Hanke’s report on inflation rates, which placed Sri Lanka’s inflation as second-highest in the world behind only Zimbabwe, as the food basket and consumption patterns used are internationally representative measures, instead of considering local patterns, economists advised the Sri Lankan public.

Speaking to The Morning Business, former Central Banker Dr. Roshan Perera, said that there is not much of a correlation between the inflation rates presented by Hanke and the official inflation rates published by the relevant countries.

“Sri Lanka has been doing the current inflation calculation since the 1950s, so we are familiar with it and we know the methodology; so I would go by Sri Lanka’s calculation,” she added. 

Moreover, she said that the calculation used by Sri Lanka is followed by most of the central banks in the world. Also, she noted that inflation has been rising in Sri Lanka since November 2021 when it hit double digits (from 7.8 % in October 2021 to 11.1% in November).

Thus, Dr. Perera said: “We don’t have to be alarmed looking at Steve Hanke’s inflation.”

Speaking to us, Advocata Institute Economics Researcher Rehana Thowfeek said Hanke’s inflation calculation is based on Purchasing Power Parity (PPP), which uses an internationally representative food basket and exchange rate differences, while the inflation calculation by the Department of Census and Statistics (DCS) uses a locally allocated basket based on previous consumption patterns and data on household income and expenditure.

The inflation dashboard computed by Steve Hanke, a Professor of Applied Economics at Johns Hopkins University in the US, showed that Sri Lanka’s year-on-year (YoY) inflation stood at 132% as of March 2022. 

The recently released data shows that Sri Lanka has the world’s second-highest inflation. Zimbabwe is at the highest position, with its inflation reaching 256%, while the third and fourth places are occupied by Lebanon and Turkey, respectively, with annual inflation figures at 130% and 97%. 

Meanwhile, headline inflation, as measured by the YoY change in the Colombo Consumer Price Index (CCPI, 2013 = 100) increased to 29.8% in April 2022 from 18.7% in March 2022, according to the Central Bank of Sri Lanka (CBSL).

The CCPI and the National Consumer Price Index (NCPI) are used by the DCS to track the different consumption goods and patterns seen in Colombo and outside Colombo to determine the monthly inflation.

The CCPI has about 392 items in the basket, while the NCPI has about 407 items, and based on consumption patterns they have allocated a share for each item in the basket.

“They (DCS) track those items every week, collect the prices from the supermarkets of those items, and see how the prices have changed,” Thowfeek said.

But in Hanke’s calculation, “it’s not really the price at the point of sale, but even the exchange rate comes into play”, she added.

So she noted that since the depreciation of the Sri Lankan rupee after the free float of the dollar, the inflation statistics by Hanke have been “way over the roof” when compared to local statistics.

Further, she added that almost all national statistical bodies in the world follow a standard method where they come up with a basket of goods based on their own local consumption to calculate inflation.

“When using an internationally representative basket, the consumption patterns are so different from country to country,” she said.

For example, she pointed out that in the US, the consumption of rice is totally different to that of Sri Lanka.

“So it is very difficult to come up with a basket of goods that is related to the entire world,” Thowfeek said.

She said that according to her, the calculation used by Sri Lanka is the best depiction of national inflation when compared to Hanke’s calculations, as there is a huge disparity in the types of goods used in the two baskets.

Frontier Research Product Head of Macroeconomic and Thematic Research Chayu Damsinghe said that calling Hanke’s calculation “inflation” is a little strange, as it assumes everything in Sri Lanka works on a dollarised basis.

He said the reason why Hanke’s numbers are very high compared to Sri Lanka’s official numbers is that Hanke considers the year-on-year rupee depreciation in the unofficial or black markets and adds inflation in the US for the calculation.

As this black market depreciation rate is added and the calculation considers things in dollar terms, what matters is not Sri Lankan inflation but inflation in the US.

“It is really not relevant to Sri Lanka, but it matters if you are a foreign investor who has invested in Sri Lanka to see how much the value of your investment has changed over time,” Damsinghe said. He noted that the Hanke inflation calculation matters to someone who primarily deals with dollars, rather than someone who deals with rupees.


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