Abstract
Staff Studies is the bi-annual (March and September) peer-reviewed journal of the Central Bank of Sri Lanka. The Journal aims at stimulating innovative research for the analysis of current macroeconomic issues and policy challenges faced by central banks while providing a forum to present recent theoretical and empirical research.
Highlights
Factors affecting domestic inflation could broadly be divided into two categories, i.e., demand side and supply side factors that could arise domestically or externally
Data Table 4 summarizes the results of regression that measures the impact of change in monthly diesel prices on the Colombo Consumers’ Price Index (CCPI) and Sri Lanka Consumers’ Price Index (SLCPI)
Price of diesel was used as a proxy for petroleum prices as diesel is widely used for transportation, power generation and has a direct relationship with consumer prices
Summary
Factors affecting domestic inflation could broadly be divided into two categories, i.e., demand side and supply side factors that could arise domestically or externally. Monetary policy, fiscal policy, wage policy and seasonal factors such as festivities affect inflation, while on the supply side, weather, cost of inputs, level of food production and changes in administered prices have an impact on inflation. Loose monetary and fiscal policies, upward revision of administered prices such as passenger transport fares and electricity tariff, fluctuation of domestic agriculture production, rupee depreciation and lagged impact of wage increases were the key factors that affected price levels in the recent past. In Sri Lanka, kerosene and diesel are the two major petroleum products that have an impact on prices. The measurement of the impact of diesel price on domestic price levels is more crucial at present because domestic petroleum prices are expected to be determined according to world prices, exchange rate movements and other cost factors on the basis of a pricing formula, though it has remained suspended for a few months. With the opening of the petroleum market for competition, domestic petroleum prices are likely to change more frequently responding to market developments
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