Introduction The inflation is more important to the economy. High rate of inflation are the big issues for developing countries. Sri Lanka is a developing country. we choose the inflation as our dependent variable and select the interest, wage, exchange rate are independent variables. The inflation effect these variables. At the same time these independent variables also make the affection on inflation. But we choose the 2nd way.
Increase in wages that causes to increase the inflation rate . The increase in wages that increase the money supply due to that the inflation increases. The rise in exchange rate make the inflation rate goes to low value. There is a negative relationship between exchange rate & the inflation rate. As a result of high rate of interest rate make the inflation goes down. That makes fall in loans & reduce the money supply. There is a negative relationship between interest rate & inflation.
The economic decision makers can make the decision which variables may hugely affect the inflation. They can control the variable which is mostly controlling the inflation. The sources are taken mainly from central bank report of Sri Lanka, census & statistics department.
Inflation Inflation is a rise in the general level of prices of goods and services in an economy over a period of time. Inflation is measured in terms of changes in price indices. Such an index would indicate the relative cost of a specified basket of goods and services over time, compared with the cost of such basket of goods and services during a particular (base) year. In Sri Lanka there are several price indices calculated by the Central Bank of Sri Lanka and the Department of Census and Statistics. Few main indices are: Colombo Consumer Price Index(CCPI) Colombo District Consumer Price Index (CDCPI) Sri Lanka Consumer Price Index (SLCPI) Wholesale Price Index (WPI).
In year 2002 there will be hyperinflation. The inflation rate is 9.6% in 2002.because in year 2001 there is a negative economic growth occurred. In year 2006 the annual inflation rate is 10.0. It occurs because of tsunami. That also affect the 2007. annual rate of inflation is 15.8 in 2007. In year 2008, the inflation rate recorded was at a peak at 22.6 percent. growth of money supply, interest rate, budget deficit & depreciation of the Sri Lanka currency against the dollar contributed to this outcome.
In 2009 the inflation rate is 3.4. The domestic price of fuel remained unchanged since the reduction in the price of petrol at the end of 2009. The annual average rate of inflation stood around 5.6 percentages on 2010. The increase in the price of fuel in the international market & Increased supplies of domestic agricultural produce increase the inflation. And also there is a reduction in the import duty of key food items. There are noticeable signs of inflation 2011 year inflation was 7 per cent. The increase in the index was largely driven by the food and non-alcoholic beverages.
Statistical analyze of inflation Summary for Inflation A nderson-Darling N ormality Test A -S quared 0.32 P -V alue 0.460 M ean 10.500 S tDev 5.715 V ariance 32.662 S kew ness 1.03147 Kurtosis 0.96276 N 10 M inimum 3.400 1st Q uartile 6.125 M edian 9.500 3rd Q uartile 14.600 4 8 12 16 20 24 M aximum 22.600 95% C onfidence Interv al for M ean 6.412 14.588 95% C onfidence Interv al for M edian 6.097 14.748 95% C onfidence Interv al for S tDev 9 5 % C onfidence Inter vals 3.931 10.434 Mean Median 5.0 7.5 10.0 12.5 15.0
The mean shows that the average inflation is 10.5 for 10years. mean=10.500.mean, median are the measurement of central tendency. graph is showed positively skewness. The graph shows the skewness as 1.03147. This graph shows the mean > median. The 1st quartile=6.125 and the 3rd quartile=14.600. The 2nd quartile range is median. 1st quartile range & the 2nd quartile range=3.375(9.500-6.125). The difference between 3rd quartile range & 2nd quartile range=5.1(14.6-9.5). The difference between the 1st quartile & 2nd quartile range is smaller than the 3rd quartile range & 2nd quartile range. So this is also a reason for positive skewness.
Wages RateWage is the Price of Labour.A macroeconomic theory to explain the cause-and-effectrelationship between rising wages and rising prices, or inflation.Real wage rate = nominal wage rate –inflation rate Minimum Wage Rates in Sri Lanka Industry Worker Category Minimum wages (in LKR)Plantation Sector 380 per day plus Attendance Bonus 105 per day plus productivity incentive 30 per dayIndustrial Sector Unskilled 6500-7500 per month Semi Skilled 7000-8000 per month
Analyzing the above the graph In 2002 & 2003 government employees wages rate are no big changes. In 2005, public sector employees were able to enjoy significant wage increases as a result of the implementation of the second salary revision of 2004 effective from 01 December 2004. The December2004 revision granted a 40% increase of the basic salary subject to a minimum of Rs 3,250 per month and a maximum of Rs 9,000 per month, plus allowances. Parallel to the increase in public sector salaries under the Budget Proposals 2005, a new Budgetary Relief Allowance of Workers Act (2005) was enacted in Parliament with effect from 1 August 2005 to increase private sector salaries by Rs 1,000.
STATISTICAL ANALYZES FOR WAGES Summary for Wages Rate A nderson-D arling N ormality Test A -S quared 0.27 P -V alue 0.593 M ean 2406.0 S tD ev 920.2 V ariance 846803.2 S kew ness 0.15355 Kurtosis -1.53784 N 10 M inimum 1265.8 1st Q uartile 1514.0 M edian 2365.2 3rd Q uartile 3251.5 1500 2000 2500 3000 3500 4000 M aximum 3760.8 95% C onfidence Interv al for M ean 1747.7 3064.2 95% C onfidence Interv al for M edian 1487.0 3286.7 95% C onfidence Interv al for S tD ev 9 5 % C onfidence Inter vals 633.0 1680.0 Mean Median 1500 2000 2500 3000 3500
Mean is the average amount of wages rate is 2406.0 for 10 years standard deviation is 920.2. Mean, Median, Variance are measurement of central tendency, median=2365.2 this graph illustrates positive skewness . The graph shows the skewness as 0.15355. This graph shows the mean > median. The difference between the 1st quartile & 2nd quartile range is smaller than the 3rd quartile range & 2nd quartile range. So this is also a reason for positive skewness
THE COMPARISON BETWEEN INFLATION AND WAGES. Time Series Plot of Inflation, Wages Rate 25 Variable Inflation W ages Rate 20 15 Data 10 5 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Year
Wage push inflation Wage push inflation transpires whenever the nominal wage rate increases at a greater pace than the growth in the productivity of Labour. In turn, the firm will pass on the cost increases to the consumer by way of increased prices. Increases in money wage rates matched by increases in labour productivity are not inflationary. wage-push inflation is a result of exploitation of the power of the labour unions for higher nominal wage rates that is not matched by increases in labour productivity. Developments in wages have a significant bearing on consumer prices.
Interest Rate Interest rate is the percentage of the face value of a bond or the balance in a deposit account that you receive as income on your investment. Interest Rate = (Total Repayment Amount - Amount Borrowed) / (Amount Borrowed) Four things influence interest rates: the risk of default, the length of the loan, inflation rates, and the real rate. Comparing interest rate with inflation choose loan lending rate is a category of interest rate. The reason is banking sector increasing lending loan rate people who lending loan from bank also automatically declines.
Analyzing this graph In year 2002-2004 lending interest rate decreasing, then year 2005-2008 continuously increasing. again 2009 decreasing for 1.23%, in 2011 interest rate is 13.75%. in the year 2001 there is a negative economic growth. After the tsunami 2006,2007&2008 lending loan interest rate going up because of the reason after that there is getting more housing loans from bank increasing . Srilanka can regain its economic activity and rebuild its capital stock. Rebuilding loan rates increasing.
Stastical analysis of loan interest rate Summary for Loan Intrest A nderson-Darling N ormality Test A -S quared 0.21 P -V alue 0.791 M ean 16.675 S tDev 1.863 V ariance 3.470 S kew ness 0.03867 Kurtosis -1.16764 N 10 M inimum 13.760 1st Q uartile 15.047 M edian 16.510 3rd Q uartile 18.700 14 15 16 17 18 19 M aximum 19.270 95% C onfidence Interv al for M ean 15.343 18.007 95% C onfidence Interv al for M edian 15.032 18.730 95% C onfidence Interv al for S tDev 9 5 % C onfidence Inter vals 1.281 3.401 Mean Median 15 16 17 18 19
Mean is the average amount of loan rates that is 16.675 for 10 years. Standard deviation is 1.863.mean,median,variance are measurement of the central tendency median=16.510. mean, median are related to same(mean=median as shows 16.675=16.510).1st quartile=15.047,2nd quartile=16.510.3rd quartile range is 18.700 inter quartile range is(18.700-15.047)=3.653 mean and median are not equal small difference between two in digit level. Confidence interval for median is 95%.so we can analyze this is a normal skewness.ve
COMPARISON BETWEEN INFLATION & LOAN RATE Time Series Plot of Inflation, Loan Intrest 25 Variable Inflation Loan Intrest 20 15 Data 10 5 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Year
When comparing between inflation and loan rate there is no sharply change in loan rate but there is a peak in inflation rate in 2008. in wear 2009 great depression on inflation but loan rate is high. in 2004 dramatic decline in economic activity pushdown interest rate. On other hand lower sales, production and employment during the adjustment period increasing changes that increasing monetary growth inflation accelerate in future that lead to increase interest rate.
Exchange Rate Rate at which one currency may be converted into another currency. Nominal Effective Exchange Rate Real Effective Exchange Rate
The historical changes in foreign exchange rateYear REER Chart of REER2003 71.326 100 1002004 67.217 80 802005 72.6282006 76.890 60 60 REER2007 78.025 40 402008 95.0372009 97.326 20 202010 100.000 0 0 2003 2004 2005 2006 2007 2008 2009 2010 20112011 101.857 Year
The REER is calculated as removing the inflation rates of the 24 countries. The main focus of the NEER and the REER is on the trade balance, particularly the exchange rate induced changes in trade flows. A trend appreciation of the real effective exchange rate is considered unfavorable for the growth of export and import competing industries.
Statistical analyze of REER Summary for REER A nderson-Darling N ormality Test A -S quared 0.58 P -V alue 0.093 M ean 84.479 S tDev 13.830 V ariance 191.256 S kew ness 0.15175 Kurtosis -2.13747 N 9 M inimum 67.217 1st Q uartile 71.977 M edian 78.025 3rd Q uartile 98.663 70 80 90 100 M aximum 101.857 95% C onfidence Interv al for M ean 73.848 95.109 95% C onfidence Interv al for M edian 71.623 99.391 95% C onfidence Interv al for S tDev 9 5 % C onfidence Inter vals 9.341 26.494 Mean Median 70 75 80 85 90 95 100
The mean shows that the average REER is 84.479 for 9 years. In this graph the mean=84.mean, median are the measurement of central tendency. The median=78.025. This graph is showed positively skewness. The graph shows the skewness as 0.15175. This graph shows the mean > median. The difference between the 1st quartile & 2nd quartile range is smaller than the 3rd quartile range & 2nd quartile range. So this is also a reason for positive skewness.
The comparison between REER & inflation Time Series Plot of Inflation Rate, REER, NEER 140 140 Variable Inflation Rate REER 120 120 NEER 100 100 80 80 Data 60 60 40 40 20 20 0 0 2003 2004 2005 2006 2007 2008 2009 2010 2011 Year
Since, 1977, Sri Lanka is importing more than its export. Its negative trade balance is increasing over the years. This depreciates the Sri Lankan currency. Because government expenditure also is increasing over the years due to defense expenditure and other investments, government budget deficit is increasing. In order to finance government expenditure, the government treasury is using open market operation to borrow money. This increases the money supply and then depreciates Sri Lankan currency. Sri Lankan economy is facing higher inflation due to not only increase in money supply but also high pass through of foreign exchange rate shock into the economy.
Total Analysis Time Series Plot of Inflation, REER, Wages Rate, Loan Intrest Variable 100 Inflation REER W ages Rate Loan Intrest 80 60Data 40 20 0 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Year
Here there are decreases and increases in variable such as REER and loan interest rate but in the variable of wages rate there are no decreases. wages rate impact the inflation in the way the increase the inflation. The inflation is not always going to increase over 10 years because other variables such as REER and loan interest rate are giving some impact on decreasing the inflation.
In the most cases the inflation mostly depend on the REER & Loan interest rate because the inflation curve mostly change accounting to the REER curve & loan interest rate curve . While other variables also have an impact on the change in the inflation curve but the REER and Loan interest rate have most impact than the other variables such as wages rate.
Conclusion The inflation rate is dependent on some independent variables wages, lending interest rate, and foreign currency rate. The increase in wages increase the money supply in the economy as a result of this the inflation rate increase. The increase in lending interest may cause the loan decrease & so the money supply increase so that the inflation rise in the economy.
The increase in foreign currency rate makes our country currency value higher. So the inflation falls in the economy. The foreign currency rate(REER) and interest rate are the most important variables that affecting the inflation compare to wages.