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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).

 Mainly inflation divided into two:
 Cost-push-inflation
 Demand pull inflation

Inflation effects on the economy
Year Inflation
Chart of Inflation Rate
2002 6.2 25 25

2003 14.2
20 20
2004 9.0

Inflation Rate
2005 11.0
15 15
2006 10.0

2007 15.8 10 10

2008 22.6
5 5
2009 3.4

2010 5.9
0 0
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
2011 6.9 Year

 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 Rate
Wage is the Price of Labour.

A macroeconomic theory to explain the cause-and-effect
relationship 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 day

Industrial Sector Unskilled 6500-7500 per month
Semi Skilled 7000-8000 per month

Historical changes of wage rate
Year Wages
Chart of Wages Rate
2002 1265.78
4000 4000
2003 1294.44

2004 1587.18
3000 3000
2005 1801.44 Wages Rate

2006 2144.38
2000 2000

2007 2586.10

2008 2925.68
1000 1000
2009 3156.08

2010 3537.62
0 0
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
2011 3760.80 Year

 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
1500 2000 2500 3000 3500 4000 M aximum 3760.8
1747.7 3064.2
1487.0 3286.7
95% C onfidence Interv al for S tD ev
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.

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.

Historical change of interest rate
Year loan interest rate Chart of loan interest rate
20 20
2002 18.62

2003 16.75
15 15
2004 14.92

2005 15.09 loan interest rate

10 10
2006 16.27

2007 17.37

2008 19.27 5 5

2009 18.94

2010 15.76 0 0
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
2011 13.76 Year

 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 -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
M edian 16.510
14 15 16 17 18 19 M aximum 19.270
15.343 18.007
15.032 18.730
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 rate

Year REER Chart of REER

2003 71.326 100 100

2004 67.217
80 80
2005 72.628

2006 76.890 60 60
REER

2007 78.025
40 40
2008 95.037

2009 97.326 20 20

2010 100.000
0 0
2003 2004 2005 2006 2007 2008 2009 2010 2011
2011 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 -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
M edian 78.025
70 80 90 100 M aximum 101.857
73.848 95.109
71.623 99.391
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.

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

60
Data

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.

Appendix
Loan interest rate
Quarter 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Q1 19.10 17.80 15.20 14.90 16.00 16.84 18.32 19.73 16.89 14.18

Q2 18.90 17.20 14.90 15.00 16.10 17.14 19.07 19.55 16.08 13.71

Q3 18.30 16.40 14.80 15.10 16.40 17.46 19.61 19.18 15.35 13.68

Q4 18.20 15.70 14.80 15.40 16.60 18.08 20.13 17.41 14.80 13.50

REER
Months 2003 2004 2005 2006 2007 2008 2009 2010 2011
January 75.63 67.51 72.20 75.46 80.34 87.99 99.73 97.90 103.02
February 74.31 65.99 72.35 75.12 78.66 90.12 101.92 99.67 103.40
March 72.17 66.62 70.77 73.02 76.13 89.36 101.28 98.62 101.94
April 71.19 66.94 70.75 74.16 74.46 90.13 96.15 96.89 100.08
May 71.16 69.38 72.02 76.23 75.03 91.92 96.42 100.44 100.92
June 71.65 68.81 72.69 79.31 77.34 95.14 97.19 102.48 100.83
July 70.89 67.17 73.72 77.88 78.00 94.54 97.75 101.10 100.87
August 69.37 66.35 71.82 77.05 77.28 96.36 96.50 100.48 100.11
September 70.25 67.15 71.81 78.63 76.37 99.02 95.90 100.51 102.19
October 69.24 66.25 72.43 77.79 78.09 102.78 94.56 99.15 102.82
November 69.92 66.62 74.72 78.78 82.02 103.94 94.56 100.45 102.70

Wages Rate

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Central Govt. 1525.3 1525.0 1797.7 2417.5 3150.8 3828.4 4116.1 4502.8 4651.6 4964.5
Employees

Government 1180.3 1180.1 1818.6 1818.6 2304.2 2740.0 2938.6 3215.3 3321.7 3576.1
Teachers

Wages Board 1126.5 1205.2 1223.0 1329.7 1358.2 1648.8 2070.4 2171.4 2865.3 2996.1
Workers

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