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FINANCIAL CHRONICLE™ » DAILY CHRONICLE™ » Sri Lanka urban index finds prices rising 20-pct over year

Sri Lanka urban index finds prices rising 20-pct over year

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Kumar

Kumar
Senior Vice President - Equity Analytics
Senior Vice President - Equity Analytics

Feb 21, 2013 (LBO) - An index that tracks key essential expenses of urban middle class households in Sri Lanka has found that prices rose more than 20 percent over the past year, about double that of a widely watched official index.

Capital Alliance Research, tracked the prices of food and drink, fuel and light, communications, transportation across the past year found that prices rose 21.6 percent in the year to January 2012.

The official Colombo Consumer Prices found the cost of its basket rising 9.8 percent in the same period.

"The difference is that our index captures urban households island-wide," Purasisi Jinadasa, head of research at Capital Alliance said.

"So this is an urban price index which accounts for 54 percent of urban households earning above 80,000 rupees a month."

The researchers used 2009/2010 official income and expenditure survey which put the average income at 60,000 rupee a month and adjusted it by the nominal gross domestic product growth as a proxy for income increases up to last year to get 80,000 rupees.

Food and drink prices were collected from supermarket chains, petrol from state-run Ceylon Petroleum Corporation, cooking gas from Laugfs gas, communications from Dialog Axiata, public transport, power and water from state-run utilities.

Health and education, which is provided at tax-payer expense by the government was excluded. Housing has also been excluded due to difficulties in collecting rents.

In many developed countries, critics say the state has used rents very effectively to understate inflation.

Unlike house prices themselves, which respond faster to monetary policy, rents respond slower, allowing central banks to keep printing money longer to generate 'growth'. In the US so-called 'owner imputed rents' are used to understate inflation.

Critics say another widely used state technique to understate inflation is to change the basket as often as possible, based on a method devised by Hermann Paasche, an economist.

In the US the basket is changed on the run substituting cheaper goods for more expensive ones, when inflation spikes sharply,

Such techniques have been derided by critics as benefiting from a fall in living standards of citizens impoverished by the state-induced inflation who are forced to move down from 'beef to dog food'.

The Capital Alliance index will maintain a fixed basket using a Laspeyres formula, named after its founder Etienne Laspeyres.

Inflation became a world-wide problem mainly after the Second World War due to unrestrained expansion of fiat money supply by state-run central banks that sought to generate prosperity through currency debasement.

In earlier ages, specie money and privately owned central banks restrained by specie (mainly gold) and public opinion sometimes given legal effect through parliament had been forced to keep inflation down with periods of inflation followed by deflation.
http://lbo.lk/fullstory.php?nid=1528653321

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