Sri Lanka’s economy marks first deflation in 39 years

Sub : Eco

Sec: Inflation and Unemployment

Context:

Sri Lanka’s economy recorded falling consumer prices for the first time in 39 years, with the September inflation figure dipping to negative 0.5%. Sri Lanka last recorded deflation in 1985.

Inflation in Sri Lanka:

In 2022, inflation in Sri Lanka peaked at 69.8% at the height of an unprecedented economic crisis marked by an acute shortage of food, fuel and medicines.
The crisis was exacerbated by political instability and public unrest.
The government has implemented various measures, including adjusting interest rates and seeking assistance from international organizations like the IMF, to stabilize the economy and control inflation.

Inflation:

Inflation refers to the rise in the prices of most goods and services of daily or common use, such as food, clothing, housing, recreation, transport, consumer staples, etc.
Inflation measures the average price change in a basket of commodities and services over time.
Inflation is indicative of the decrease in the purchasing power of a unit of a country’s currency. This could ultimately lead to a deceleration in economic growth.
However, a moderate level of inflation is required in the economy to ensure that production is promoted.
In India, inflation is primarily measured by two main indices, WPI & CPI which measure wholesale and retail-level price changes, respectively.
As per RBI, inflation target of 4 per cent with a +/-2 per cent tolerance band is set for 2021-2025 period.

Deflation:

Deflation happens when the general price level of goods and services decreases, and the inflation rate falls below 0%.
Deflation increases the value of currency, allowing people to buy more goods and services with the same amount of money.

Deflation vs Disinflation:

Disinflation refers to a decrease in the level of inflation whereas deflation implies negative inflation.

Causes of Deflation:

Effects of deflation include: