1. Introduction The inflation is more important to the economy. High rate of inflation are the big issues for developingcountries. Sri Lanka is a developing country. we choose the inflation as our dependent variable andselect the interest, wage, exchange rate are independentvariables. The inflation effect these variables. At the same time theseindependent variables also make the affection on inflation.But we choose the 2nd way.

2. Increase in wages that causes to increase the inflationrate . The increase in wages that increase the moneysupply due to that the inflation increases. The rise in exchange rate make the inflation rate goesto low value. There is a negative relationship betweenexchange rate & the inflation rate. As a result of high rate of interest rate make theinflation goes down. That makes fall in loans & reducethe money supply. There is a negative relationshipbetween interest rate & inflation. 3. 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. 4. Inflation Inflation is a rise in the general level of prices of goods and services inan economy over a period of time. Inflation is measured in terms of changes in price indices. Such anindex would indicate the relative cost of a specified basket of goods andservices over time, compared with the cost of such basket of goods andservices during a particular (base) year. In Sri Lanka there are several price indices calculated by the CentralBank of Sri Lanka and the Department of Census and Statistics. Fewmain indices are: Colombo Consumer Price Index(CCPI) Colombo District Consumer Price Index (CDCPI) Sri Lanka Consumer Price Index (SLCPI) Wholesale Price Index (WPI). 5. Mainly inflation divided into two: Cost-push-inflation Demand pull inflation 6. Inflation effects on the economyYear InflationChart of Inflation Rate2002 6.225252003 14.220202004 9.0 Inflation Rate2005 11.015152006 10.02007 15.8 10102008 22.65 52009 3.42010 5.90 0 2002 2003 20042005 2006 2007 2008 2009 2010 20112011 6.9 Year 7. In year 2002 there will be hyperinflation. Theinflation rate is 9.6% in 2002.because in year 2001there is a negative economic growth occurred. In year 2006 the annual inflation rate is 10.0. It occursbecause of tsunami. That also affect the 2007. annualrate of inflation is 15.8 in 2007. In year 2008, the inflation rate recorded was at a peakat 22.6 percent. growth of money supply, interest rate,budget deficit & depreciation of the Sri Lankacurrency against the dollar contributed to thisoutcome. 8. In 2009 the inflation rate is 3.4. The domestic price offuel remained unchanged since the reduction in theprice of petrol at the end of 2009. The annual average rate of inflation stood around 5.6percentages on 2010. The increase in the price of fuelin the international market & Increased supplies ofdomestic agricultural produce increase the inflation.And also there is a reduction in the import duty of keyfood items. There are noticeable signs of inflation 2011 yearinflation was 7 per cent. The increase in the index waslargely driven by the food and non-alcoholicbeverages. 9. Statistical analyze of inflationSummary for Inflation A nderson-Darling N ormality TestA -S quared0.32P -V alue 0.460M ean10.500S tDev5.715V ariance32.662S kew ness1.03147Kurtosis0.96276N10M inimum3.4001st Q uartile 6.125M edian 9.5003rd Q uartile14.6004 8121620 24M aximum 22.60095% C onfidence Interv al for M ean6.41214.58895% C onfidence Interv al for M edian6.09714.74895% C onfidence Interv al for S tDev9 5 % C onfidence Inter vals3.93110.434Mean Median5.0 7.5 10.0 12.515.0 10. 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 as1.03147. This graph shows the mean > median. The 1st quartile=6.125 and the 3rd quartile=14.600. The 2nd quartile rangeis median. 1st quartile range & the 2nd quartile range=3.375(9.500-6.125). Thedifference between 3rd quartile range & 2nd quartile range=5.1(14.6-9.5). The difference between the 1st quartile & 2nd quartile range is smallerthan the 3rd quartile range & 2nd quartile range. So this is also a reasonfor positive skewness. 11. Wages RateWage is the Price of Labour.A macroeconomic theory to explain the cause-and-effectrelationship between rising wages and rising prices, or inflation.Real wage rate = nominal wage rate inflation rateMinimum Wage Rates in Sri Lanka Industry Worker CategoryMinimum wages (in LKR)Plantation Sector380 per day plus Attendance Bonus 105 per day plus productivity incentive 30 per dayIndustrial SectorUnskilled 6500-7500 per month Semi Skilled7000-8000 per month 12. Historical changes of wage rateYear Wages Chart of Wages Rate2002 1265.784000 40002003 1294.442004 1587.183000 30002005 1801.44 Wages Rate2006 2144.382000 20002007 2586.102008 2925.681000 10002009 3156.082010 3537.6200 2002 2003 2004 2005 2006 2007 2008 2009 2010 20112011 3760.80Year 13. Analyzing the above the graph In 2002 & 2003 governmentemployees wages rate are no big changes.In 2005, public sector employees were able to enjoy significantwage increases as a result of the implementation of the secondsalary revision of 2004 effective from 01 December 2004. The December2004 revision granted a 40% increase of the basicsalary subject to a minimum of Rs 3,250 per month and amaximum of Rs 9,000 per month, plus allowances. Parallel to the increase in public sector salaries under the BudgetProposals 2005, a new Budgetary Relief Allowance of WorkersAct (2005) was enacted in Parliament with effect from 1 August2005 to increase private sector salaries by Rs 1,000. 14. STATISTICAL ANALYZES FOR WAGES Summary for Wages Rate A nderson-D arling N ormality TestA -S quared 0.27P -V alue0.593M ean 2406.0S tD ev920.2V ariance 846803.2S kew ness 0.15355Kurtosis-1.53784N 10M inimum1265.81st Q uartile 1514.0M edian 2365.23rd Q uartile 3251.51500 2000 25003000 3500 4000M aximum3760.895% C onfidence Interv al for M ean1747.73064.295% C onfidence Interv al for M edian1487.03286.795% C onfidence Interv al for S tD ev9 5 % C onfidence Inter vals633.0 1680.0 MeanMedian 15002000250030003500 15. Mean is the average amount of wages rate is 2406.0 for 10 yearsstandard deviation is 920.2. Mean, Median, Variance are measurement of centraltendency, median=2365.2 this graph illustrates positive skewness . The graph shows the skewness as 0.15355. This graph shows the mean >median. The difference between the 1st quartile & 2nd quartile range is smallerthan the 3rd quartile range & 2nd quartile range. So this is also a reasonfor positive skewness 16. THE COMPARISON BETWEEN INFLATION AND WAGES.Time Series Plot of Inflation, Wages Rate 25 VariableInflationW ages Rate 20 15Data 10 52002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Year 17. Wage push inflation Wage push inflation transpires whenever the nominal wage rateincreases at a greater pace than the growth in the productivity ofLabour.In turn, the firm will pass on the cost increases to the consumer byway of increased prices. Increases in money wage rates matched by increases in labourproductivity are not inflationary. wage-push inflation is a result of exploitation of the power of thelabour unions for higher nominal wage rates that is not matched byincreases in labour productivity. Developments in wages have a significant bearing on consumer prices. 18. Interest Rate Interest rate is the percentage of the face value of a bond or thebalance in a deposit account that you receive as income on yourinvestment. Interest Rate = (Total Repayment Amount - Amount Borrowed) /(Amount Borrowed) Four things influence interest rates: the risk of default, the length ofthe loan, inflation rates, and the real rate. Comparing interest rate with inflation choose loan lending rate is acategory of interest rate. The reason is banking sector increasinglending loan rate people who lending loan from bank alsoautomatically declines. 19. Historical change of interest rateYear loan interest rateChart of loan interest rate 20 202002 18.622003 16.75 15 152004 14.922005 15.09loan interest rate 10 102006 16.272007 17.372008 19.27 552009 18.942010 15.76 002002 2003 2004 2005 2006 2007 2008 2009 2010 20112011 13.76 Year 20. 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 upbecause of the reason after that there is getting more housing loansfrom bank increasing . Srilanka can regain its economic activity and rebuild its capital stock.Rebuilding loan rates increasing. 21. Stastical analysis of loan interest rateSummary for Loan Intrest A nderson-Darling N ormality TestA -S quared0.21P -V alue 0.791M ean 16.675S tDev 1.863V ariance3.470S kew ness 0.03867Kurtosis-1.16764N 10M inimum 13.7601st Q uartile15.047M edian16.5103rd Q uartile18.700 14 1516 17 1819M aximum 19.27095% C onfidence Interv al for M ean15.343 18.00795% C onfidence Interv al for M edian15.032 18.73095% C onfidence Interv al for S tDev 9 5 % C onfidence Inter vals1.281 3.401Mean Median151617 1819 22. 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 ofthe central tendency median=16.510. mean, median are related to same(mean=median as shows16.675=16.510).1st quartile=15.047,2nd quartile=16.510.3rd quartile range is18.700 inter quartile range is(18.700-15.047)=3.653 mean and medianare not equal small difference between two in digit level. Confidence interval for median is 95%.so we can analyze this is anormal skewness.ve 23. COMPARISON BETWEEN INFLATION & LOAN RATETime Series Plot of Inflation, Loan Intrest25VariableInflationLoan Intrest2015 Data105 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011Year 24. When comparing between inflation and loan rate there is no sharplychange 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 theadjustment period increasing changes that increasing monetarygrowth inflation accelerate in future that lead to increase interest rate. 25. Exchange Rate Rate at which one currency may be converted into another currency. Nominal Effective Exchange Rate Real Effective Exchange Rate 26. The historical changes in foreign exchange rateYear REER Chart of REER2003 71.3261001002004 67.217 80 802005 72.6282006 76.89060 60REER2007 78.025 40 402008 95.0372009 97.32620 202010 100.0000 0 2003 2004 2005 2006 2007 2008 2009 2010 20112011 101.857 Year 27. The REER is calculated as removing the inflation rates of the 24countries. 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 consideredunfavorable for the growth of export and import competing industries. 28. Statistical analyze of REER Summary for REER A nderson-Darling N ormality TestA -S quared0.58P -V alue 0.093M ean 84.479S tDev13.830V ariance191.256S kew ness 0.15175Kurtosis-2.13747N9M inimum 67.2171st Q uartile71.977M edian78.0253rd Q uartile98.663 708090 100 M aximum101.85795% C onfidence Interv al for M ean73.848 95.10995% C onfidence Interv al for M edian71.623 99.39195% C onfidence Interv al for S tDev9 5 % C onfidence Inter vals9.34126.494 MeanMedian 70 75 80 85 9095 100 29. The mean shows that the average REER is 84.479 for 9 years. In thisgraph the mean=84.mean, median are the measurement of centraltendency. The median=78.025. This graph is showed positively skewness. Thegraph shows the skewness as 0.15175. This graph shows the mean > median. The difference between the 1st quartile & 2nd quartile range is smallerthan the 3rd quartile range & 2nd quartile range. So this is also a reasonfor positive skewness. 30. The comparison between REER & inflationTime Series Plot of Inflation Rate, REER, NEER140140 Variable Inflation Rate REER120120 NEER10010080 80 Data60 6040 4020 20 0 02003 2004 2005 2006 2007 2008 2009 2010 2011Year 31. Since, 1977, Sri Lanka is importing more than its export. Its negativetrade balance is increasing over the years. This depreciates the Sri Lankan currency. Because governmentexpenditure also is increasing over the years due to defenseexpenditure and other investments, government budget deficit isincreasing. In order to finance government expenditure, the government treasuryis using open market operation to borrow money. This increases the money supply and then depreciates Sri Lankancurrency. Sri Lankan economy is facing higher inflation due to not only increasein money supply but also high pass through of foreign exchange rateshock into the economy. 32. Total Analysis Time Series Plot of Inflation, REER, Wages Rate, Loan Intrest Variable 100 Inflation REER W ages Rate Loan Intrest 80 60Data 40 200 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011Year 33. 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. 34. 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. 35. 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. 36. 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. 37. Appendix Loan interest rate Quarter 20022003 200420052006 2007200820092010 2011 Q119.10 17.8015.20 14.90 16.0016.84 18.32 19.73 16.8914.18 Q218.90 17.2014.90 15.00 16.1017.14 19.07 19.55 16.0813.71 Q318.30 16.4014.80 15.10 16.4017.46 19.61 19.18 15.3513.68 Q418.20 15.7014.80 15.40 16.6018.08 20.13 17.41 14.8013.50 REERMonths 20032004 20052006 200720082009 2010 2011January75.63 67.5172.20 75.4680.34 87.99 99.7397.90103.02February 74.31 65.9972.35 75.1278.66 90.12 101.92 99.67103.40March72.17 66.6270.77 73.0276.13 89.36 101.28 98.62101.94April71.19 66.9470.75 74.1674.46 90.13 96.1596.89100.08May71.16 69.3872.02 76.2375.03 91.92 96.42100.44 100.92June 71.65 68.8172.69 79.3177.34 95.14 97.19102.48 100.83July 70.89 67.1773.72 77.8878.00 94.54 97.75101.10 100.87August 69.37 66.3571.82 77.0577.28 96.36 96.50100.48 100.11September70.25 67.1571.81 78.6376.37 99.02 95.90100.51 102.19October69.24 66.2572.43 77.7978.09 102.7894.5699.15102.82November 69.92 66.6274.72 78.7882.02 103.9494.56100.45 102.70 38. Wages Rate2002 2003 2004 2005 2006 2007 2008 2009 2010 2011Central Govt. 1525.3 1525.0 1797.7 2417.5 3150.8 3828.4 4116.1 4502.8 4651.6 4964.5EmployeesGovernment1180.3 1180.1 1818.6 1818.6 2304.2 2740.0 2938.6 3215.3 3321.7 3576.1TeachersWages Board 1126.5 1205.2 1223.0 1329.7 1358.2 1648.8 2070.4 2171.4 2865.3 2996.1Workers