CB to upgrade survey system to capture more accurate inflation expectations

Sri Lanka will have greater clarity on its inflation expectation position with the Central Bank gearing up to introduce a newer and upgraded process that captures a countrywide pulse.

The Central Bank’s latest annual report highlighted that the institution is in the midst of establishing an Inflation Perception Survey (IPS) using the Country-wide Data Collection System (CWDCS) network.

The IPS would essentially seek qualitative responses from households on expected level of variation in consumer expenditure, including food and non-food categories, for three months and one-year ahead periods.

The Central Bank expects that the IPS would provide extra insights into inflation, while facilitating to obtain a more accurate read of households’ true inflation perceptions.

“Greater financial literacy would in turn improve the process of expectations formation of the public, which is vital for the effectiveness of monetary policy under the Flexible Inflation Targeting (FIT) regime,” the Central Bank states in its annual report.

The Inflation Expectation Survey (IES) will be expanded beyond the Colombo District through the newly established CWDCS, which is featured with real-time data management via a system of tablet computers together with a software application.

With the use of upgraded process and procedures, the coverage and precision of the household sector inflation expectations is expected to improve with the upcoming system.

The primary reason for the upgrade from the current system is due to above normal inflation expectations observed in the household sector over the years. The higher expectations in this regard are attributed to limited knowledge in economics and poor financial literacy.

At present, for the household sector, where financial literacy and information availability are comparatively lower than that of the corporate sector, group discussions are conducted with the employees of randomly selected public institutions in the Colombo District.

Acknowledged as a major limitation in the current Inflation Expectation Survey is the restrained geographical coverage.