Sri Lanka's inflation accelerates to 9.3% in June

Sri Lanka's consumer prices rose 9.3 percent in June 2012 from a year earlier, accelerating to a three and a half year high, from 7.0 percent in May, data from the state statistics office showed.

The statistics office said Sri Lanka's Colombo Consumer Price Index rose 1.9 percent during the month of June to 165.2 points.

Inflation showed up most in food prices which rose 3.8 percent. Non foods rose 0.4 percent.

Sri Lanka's rupee fell from 110 to 133 rupees over the past year, following contradictory monetary policy conducted by the Central Bank which pushed credit to unsustainable levels and triggered a balance of payments crisis.

Sri Lanka's inflation last hit these levels in January 2009 when prices rose 10.7 percent from a year earlier, during the island's previous balance of payments crisis.

Sri Lanka gets into frequent balance of payments crises because the island has a so-called soft pegged Central Bank which sterilizes foreign exchange sales with printed money and tries to control interest rates and exchange rates simultaneously.

Sri Lanka's central bank has been able to keep inflation to low single digits for nearly three years, but the monetary authority failed to raise rates in early 2011 when inflation spiked sharply and the stock market was bubbling amid a credit boom.

Later when rulers manipulated oil prices with large volumes of bank credit, the central bank also failed to allow rates to rise.

Authorities have also manipulated the inflation index.

Analysts say the Central Bank should target a very narrow inflation rate of around 2.5 to 3.0 percent and stop manipulating the inflation index to avoid balance of payments crisis and high inflation in the future.

Though the current index showed the last highest inflation since June 2012 at January 2009, an earlier index that was discontinued in May 2011 showed an inflation of 9.8 percent in April 2011.

A new inflation index was created then to show inflation at 8.9 percent instead of 9.8 percent in that month.

By targeting inflation that has been understated, a central bank will allow bubbles to develop which later results in an economic collapse. In Western markets such as the US, indices are manipulated with even more sophisticated techniques.

When central banks target so-called 'core-inflation' indices - probably the most sophisticated of indices devised to understate inflation - even greater economic bubbles and collapses happen. Core inflation is targeted by the Federal Reserve.

There have also been calls to abolish the central bank and return to a pre-1951 currency board to prevent exchange rate depreciation and high inflation.