Who cares about core inflation when
food prices are hurting the poor?

No amount of statistical jugglery would convince the general run of people, that inflation is low or that prices would be coming down. Their day-in-day out experience, has been that of escalating prices. They are only too aware of the escalating high costs of living and suffering, owing to the sharp increases in prices of basic commodities like rice, wheat flour, bread, sugar, dhal, coconuts, and all varieties of vegetables. Add to these fish and meat products, which the poor have stopped consuming. Then there are the utilities, that have soared in price, like gas, electricity and transport costs. In this context to say that, inflation is not as bad as ‘core inflation’ is only 9 percent, is a travesty of economics and statistics. The month to month increase in prices, at the end of February, was a high 28 percent, according to one index and 23 percent, according to another. Yet, even this, most people would say, is an underestimate. They may well ask, what are items that have increased in price, by only 28 percent? 

 What is ‘core inflation’? Whatever this core inflation is, people’s interest was not on ‘core’ inflation, but the rise in prices, which they had to face. In fact, the Central Bank statement, let the ‘cat out of the bag’ (or should it be bank?). This is made clear in the Central Bank Statement itself, which stated that: “The measure of underlying inflationary pressures, compiled by removing food and energy prices, from the consumer price index revealed that, core inflation remained at 9.3 per cent, in March 2008.” The statement adds: “However, domestic supply constraints fuelled by the surging international commodity prices, resulted in headline inflation, reaching a higher level during the month. Accordingly, headline inflation, as measured by the point to point change, in the New Colombo Consumers’ Price Index [CCPI (N)] increased to 23.8 per cent, in March from 21.6 per cent, recorded for February 2008.

 The analysis of this statement shows, the irrelevance of the ‘core’ inflation.  The Central Bank itself defines ‘core inflation’, as being “compiled by removing food and energy prices from the consumer price index,” Who wants a measure of inflation, that removes the most pertinent items of consumption, from the basket of consumption? Certainly, such an index does not matter to the general public, to whom it is the prices of food and utilities, that matter.  What everyone is interested in is, what the Central Bank’s statisticians call “headline Inflation”. And this is what gives us some measure of inflation, as it affects the common man, albeit inadequately. And this is disclosed in the statement, quoted above in the words, “headline inflation, as measured by the point to point change in the New Colombo Consumers’ Price Index [CCPI (N)] increased to 23.8 per cent, in March from 21.6 per cent, recorded for February 2008.” This is the crux of the issue. We can forget about core inflation, that appears to be of no relevance to people. Let it be admitted that, inflation is high and rising. In plain parlance, the cost of living is unbearable for the poor.

 It is one thing for the Central Bank, to make these calculations for whatever statistical and econometric analysis it requires to do, it is another matter to flaunt them before the public, to give the impression that, inflation is not so bad. It is also a futile exercise, as the general public does not gauge inflation on the basis of statistical indices, especially, the most sophisticated of them. People gauge inflation on the basis of their experience of the prices, they have to pay, for their daily items of consumption. In fact, the inflation the country is experiencing, is very harsh on the poor, as the most basic items, that we quoted ,at the beginning of this column, are the ones, that are rising sharpest. There are hardly any cheaper substitutes, that they can shift to.  Quite correctly, the Central Bank has stated that “domestic supply constraints fuelled by the surging international commodity prices, resulted in headline inflation reaching a higher level, during the month.”

 The Central Bank expects a deceleration in inflation. Yet, this expectation is based on the anticipation that, the underlying causes of inflation, would not continue to exert pressures. Whether this is a realistic assumption, awaits to be seen. The chances are that, such expectations may not materialise, as the uptrend in both oil and food prices are expected, to last. Besides this, although the Central Bank is quite happy with the monetary policies, it has put in pace, there are continuing pressures exerted from the fiscal front, where high expenditures are incurred, for non productive purposes. The Central Bank’s tight monetary policies alone, cannot control these inflationary pressures.

 The present inflation is a tragic one. It strikes at the bottom of the consumption pyramid. It eats into the ability of people, to feed themselves. In a country, where at least 25 percent of the population had inadequate food and were malnourished, before this wave of inflation, the current sharp rises in prices, would be a blow of massive proportions. Scenes of Sub-Saharan hunger haunt us, as we dwell on the issue.  The core issue is not, whether there is sufficient food in the country, but the issue is, whether the poor can access the food at such high prices. Food imports and domestic supplies may be adequate, for all at reasonable levels of consumption, but the incomes or ‘entitlements’ of the poor, are quite inadequate for the poor, to access the required food. In the midst of the high level of inflation, the proportion of the population, that may not be able to access adequate food, may rise to, as much as, one half of the population.

 The solution to the emerging problem, is to have a well targeted programme of income support or food subsidies. This is, however a difficult proposition, for several reasons. First, since a high proportion of the population had to be given this support, the costs of such a widespread intervention, would be very costly. The country’s finances are at such a low ebb that, it is almost an impossible task. Secondly, many who deserve, do not get the assistance, while a large number of those who do not deserve, would benefit from it. This has been the experience of both the Janasaviya and Samurdhi programmes. It is also the experience of India, in many of its programmes of state intervention, to provide food for the poor.

 The challenge before the nation is, how do we ensure that, the poor have access, to at least adequate quantities of basic food, in this context of rising food prices? The problem is immense, the state is financially too fragile and the administration is weak and corrupt. Hunger and starvation is on the cards this year, not for the rich, but the poor.