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New Consumer Price Index for Sri Lanka
The Colombo Consumers’ Price Index (CCPI), compiled monthly
by the Department of Census and Statistics (DCS) and released on the
last working day of each month, has been the official measure of
inflation in Sri Lanka since 1953. The CCPI is used for deflation of
current value aggregates in national accounts, formulation of policy
for the determination and evaluation of wages and other monetary
incomes, indexation of wages, salaries and social security benefits
and economic and social analysis. An inappropriate index could give
misleading signals for determining policies, particularly monetary
policy, and providing misleading assessments of economic performance
and the social and economic impact of policies.
The CCPI having a base year as far back as 1952 was computed
in accordance with the household consumption of the working class
households within the Colombo Municipal area, as per the family
budget survey of 1949/1950. Further, the weight structure in the
CCPI was based on the average household expenditure of a sample of
455 working class households in the Colombo City limits, enumerated
in that survey. On that basis, it was clear that such CCPI did not
reflect the current consumption behavior of the households, since it
was based on an expenditure pattern that was five and a half decades
old. It may also be noted that although interim revisions and
improvements had been made to the index from time to time over the
years, such revisions had been somewhat limited and were on a ad-hoc
basis, and did not address the inherent and obvious defects of the
index. Consequently, the CCPI could not be considered as a true
measure of inflation in Sri Lanka, particularly in view of the
following deficiencies:
(i) Inadequate representation of the true price changes in
line with the changing consumption patterns, as the index was based
on an outdated basket of goods and services. The significant changes
in consumer habits and income levels since 1949/50 have
substantially altered the size, content and composition of the
market basket of goods and services consumed.
(ii) Although the range and availability of goods and
services had enhanced over the years, these new items were not
included in the index.
(iii) The index was highly sensitive to the prices of a few
items, due to the outdated consumption pattern and unrealistic
weights attached to such items based on the outdated consumption
pattern. Hence, even a marginal price change of some of those items
led to a disproportionate change in the overall index.
(iv) It was limited in scope, both in terms of geographical
and income group coverage. Due to the above limitations, the need
for a more representative consumer price index has been voiced by
many parties for decades. The Central Bank of Sri Lanka, in
particular, has repeatedly highlighted the need for an accurate
measure of inflation, which is crucial for the conduct of monetary
policy. Recognising this need, the DCS had attempted on several
occasions to construct a new Consumer Price Index. In view of this
pressing need, an index based on the Household Income and
Expenditure Survey of 2002 has now been constructed by the DCS,
addressing the main deficiencies of the CCPI. The new index, known
as the New Colombo Consumers’ Price Index (termed CCPI(N)) is based
on a more recent household expenditure survey, representing
contemporaneous purchasing habits. The weighting pattern of this
index is based on the expenditure of all urban households in the
Colombo district. The coverage of price collection has been widened
to 12 centres in Pettah, Maradana, Wellawatte, Dematagoda, Grandpass,
Borella, Kirulapone, Dehiwala, Kotte, Nugegoda, Kolonnawa and
Ratmalana compared to 7 centres used before. For the first time, the
new index compiled by the DCS with a base year of 2002 was released
to the public on 31st December 2007.
The CCPI(N) will therefore be used as the official index for
measuring inflation in Sri Lanka. The base weights of this index
will be revised at five yearly intervals.A separate index called
“Core Inflation Index” based on the CCPI(N) is also compiled by the
DCS to be used for monetary policy purposes. The core inflation
index will exclude those items covered under Consumer Protection Act
(wheat, milk powder and gas), National Transport Commission Act,
Telecommunication RegulatoryCommission Act and the Post Office Act
and the items with some Government intervention in pricing, to
obtain a measure of underlying trend in inflation.
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