Professional Documents
Culture Documents
Price Stability - Central Bank of Sri Lanka
Price Stability - Central Bank of Sri Lanka
Stability
PAMPHLET SERIES
NO. 1
PRICE
STABILITY
Financial
System
Stability
The maintenance of price stability is one of the two core objectives of the Central
Bank of Sri Lanka. This pamphlet explains what is meant by price stability, how it
is measured, why it is important and the factors that affect price stability. The
pamphlet also describes the various inflation containment measures and how
monetary policy is used to achieve and maintain price stability. The purpose of
this pamphlet is to increase public awareness and understanding of the role of the
Central Bank of Sri Lanka in achieving price stability.
Price
Stability
Price
Stability
Rice
Bread
Beans
Coconut
Fish (Balaya)
Sugar
Electricity
Bus fare
Total
Index
Inflation
Unit
Kg
450 g
Kg
Nut
Kg
Kg
Wts
Trip
-
Number of
Units
consumed
per month
20
10
5
12
2
3
60
40
-
Base
Year
Year
One
Year
Two
Base
Year
Rs.
Rs.
Rs.
Rs.
Change in
Prices
Expenditure with
Prices in
Unit Prices in
400.00
80.00
200.00
120.00
250.00
90.00
300.00
280.00
1720.00
100.00
-
Year
One
Rs.
440.00
90.00
225.00
84.0
264.00
84.00
360.00
320.00
1867.00
108.60
Year
Two
Year
One
Year
Two
Rs.
460.00
100.00
230.00
132.00
270.00
93.00
375.00
340.00
2000.00
116.30
10.0
12.5
12.5
-30.0
5.6
-6.7
20.0
14.3
4.5
11.1
2.2
57.1
2.3
10.7
4.2
6.3
8.6%
7.1%
Price
Stability
2004
7.6
7.9
12.5
9.2
2003
6.3
2.6
3.1
5.0
2002
9.6
10.2
10.7
8.5
2001-2004
9.4
8.2
9.5
8.8
1991-2000
9.7
7.4
8.9
1981-1990
12.4
11.7
11.7
1974-1980
8.9
15.3
12.5
1961-1970
3.0
1.9
1952-1960
0.4
2.6
1952-2004
7.3
7.8
Note : 1974 was the base year for WPI and 1996 was the
base year for SLCPI.
Price
2004
1997
1990
1983
1976
1969
1962
1955
-5
Stability
1985
1990
1995
2000
2004
2.7
13.5
3.6
5.4
2.8
3.4
14.0
Japan
7.8
2.0
3.1
-0.1
-0.7
0.0
12.0
Poland
9.7
11.5
555.4
28.1
10.1
3.6
10.0
Argentina
16.0
100.8
672.2
2314.0
3.4
-0.9
4.4
Bolivia
47.2
11,749.6
17.1
10.2
4.6
4.4
4.0
Peru
59.2
163.4
7481.7
11.1
3.8
3.7
2.0
India
11.4
5.6
9.0
10.2
4.0
3.8
0.0
Singapore
8.5
0.5
3.5
1.7
1.4
1.7
11.9
5.6
9.1
12.3
4.4
7.4
110.2
45.0
60.3
88.1
54.9
8.6
26.2
1.5
21.5
7.7
6.2
7.6
8.0
Jul-05
Jul-04
Jan-05
Jan-04
Jul-03
Jan-03
Jul-02
Jan-02
Jul-01
Jan-01
Jul-00
6.0
Jan-00
Per Cent
1980
Pakistan
Turkey
Sri Lanka
Price
Stability
WHAT IS MONEY ?
We saw above that the changes in money supply are
a primary causal factor affecting price stability.
Therefore, it is useful to understand what money is
and how its supply expands and contracts. As
understood by the general public, money consists of
currency notes and coins issued by the Central Bank
of Sri Lanka but this does not capture all valuable
things that serve as money. Money is a vital part of
our everyday lives. It can be earned by working and it
can be spent now on things we need or saved for
future spending, or borrowed for immediate use.
However, money in itself really is useless and its value
lies in what it can buy. A rupee is always a rupee, as
the generic term rupee itself does not change. But
what the rupee will buy, how much it will buy, does
vary with changes in prices. Thus, money supply
affects prices and prices affect the value of money.
In economics, money is not only currency notes and
coins issued by the Central Bank. It also includes
deposits held by the public in commercial banks as
they also provide holders potential purchasing power,
i.e., power to buy goods and services. In general, three
definitions of monetary aggregates are used in
analyzing monetary developments in Sri Lanka 3. The
first is reserve money consisting of currency issued
by the CBSL and commercial banks deposits with the
3/ (i) RM = C + CD ; (ii) M1=Cp + DDp; (iii) M2 = Cp + DDp + SFDp
Where,
C
=
CD =
Cp =
DDp =
M1 =
M2 =
RM =
SFDp =
Price
Stability
Price
Stability
Credit
Volume
+
-
Domestic
Demand
Monetary
Policy
(OMO, SRR)
Total
Demand
Asset
Prices
Prices
-+
+
-
Net
External
Demand
Exchange
Rate
+
-
Domestic
Inflationary
Pressure
+-
Import
Prices
+
-
General
Price
Level
+
-
+/-