Sri Lanka’s real inflation at 74% in April says Prof Steve Hanke – Reuters

Sri Lanka’s headline inflation, as measured by the Hanke’s Annual Inflation Index, reached a staggering 74% in the year to April 15, 2022, prices from energy to commodities basis to discretionary items that were rocked last month by the Rupee’s botched float.

Professor Steve Hanke, an economist at John Hopkins, a private research university in Baltimore, Maryland in the United States, measures inflation in countries with monetary problems, taking the real underlying factors such as the cost of opportunity and other associated costs. suffer when purchasing a good or service.

Hanke’s inflation is more than three times the official headline inflation of 18.7% measured by the Colombo Consumer Price Index for March.

On April 8, the Central Bank forecast official inflation at 28% over the next three months as Sri Lanka entered an era of runaway prices due to soaring global commodity prices, the crisis of Russia and Ukraine and the floating of the rupee on March 7, which caused the currency to lose more than 60% of its value in one month.

However, some economists disagree with Hanke’s inflation index because it is based on the idea of ​​what is called purchasing power parity, a concept that measures the ability of a person who earns in rupees to buy things compared to a person who earns in dollars. .

Therefore, he incorporates the loss of his ability to buy something into the increase in the official index of inflation measured using changes in the prices of the basket of goods and services. Therefore, those who disagree with its inflation index say it is misleading as Sri Lankans trade in rupees and not dollars. However, Hanke, a neoclassical economist, is widely known as a proponent of so-called currency boards in place of central banks, which will effectively limit the amount of money printing to the amount of currency reserves. foreign we have. Therefore, his runaway inflation index argues more for a currency board, as he believes that money is the only determinant that causes inflation. Therefore, those who oppose Hanke’s inflation say that his indexed inflation needs to be looked at in this context to get his idea of ​​setting up a currency board in Sri Lanka. But economists and analysts are sharply divided on the concept of a currency board, as Sri Lanka currently does not have sufficient foreign exchange reserves and does not allow the Central Bank to support its own banking system for liquidity and liquidity. economy when it wants to accelerate growth. .

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