A Comprehensive Study on Consumer Price Index Movements: Some Critical Issues in Sri Lanka

The paper has considered the relationship between monetary aggregates, GDP and inflation, and whether there is any substantial reason for modifying the current mainstream mode of policy analysis, which frequently does not consider monetary aggregates at all. The quantity theory, as defined, centers on the prediction that there will be a long-run proportionate reaction of the price level to an exogenous increase in the nominal money stock. Engel granger test attested the long run positive relationship of inflation with money supply and national output growth in Sri Lanka. Error correction method verified that there is no such an influence in monetary aggregates to the inflation in the short run. In Sri Lankan situation, since the growth of output (GDP) has a greater positive impact on inflation compared to growth in monetary aggregates in the long run. Therefore it is not that possible to ignore the inflationary impact of money supply increments since it contributes for 10% inflationary impact. In order to control the inflation the government has to use some other methods.