When the general prices of goods and services increase, workers demand wage hikes. When higher wages are granted, prices will increase again starting a wage-price spiral. And this cycle will repeat until wage levels can no longer be supported.
The Central Bank of Sri Lanka (CBSL) will be watching a possible trend of this nature in the first quarter of 2018, according to Dr. Indrajit Coomaraswamy, the Governor of the Central Bank of Sri Lanka.
Dr. Coomaraswamy pointed out that Sri Lanka has historically been a high inflation economy, and the country needs to anchor its inflation expectations in order to transition to a low inflation economy.
“To transition to a low inflation economy, the monetary policy formulation of the Central Bank must have credibility. So, the Central Bank must have a forward-looking proactive monetary policy. That’s why the Central Bank is working to introduce the flexible inflation targeting regime. In this move, we will look at A. Wage Developments, B. Inflation Expectations, to influence the monetary policy going forward”.
“When you have some months of headline inflation , it can lead to wage pressure. So, in the coming months the Monetary Board of the Central Bank will look carefully into ‘wage settlements’ that are being effected in the beginning of the year.