19 th Anniversary Convention 2007 59 MONEY, INFLATION AND GROWTH A REVIEW OF THE CONCEPTS AND PAST RELATIONSHIPS By Ajantha Madurapperuma 1. Introduction Inflation is often referred to as the biggest man made enemy. While some argue that a certain rate of inflation is desirable, others are skeptic as to what such desirable rate is and if such a phenomenon exists. Money is often cited as the cause for inflation while there is also attribution to high oil prices, cost of imported goods and hence “cost push” inflation. Sri Lanka in the year 2006, recorded a rate of inflation of 13.7% p.a. annual average inflation which was the 18 th highest in the world for the year 2006. As at end June 2007 the point to point rate of inflation was 13% p.a. with an annual average rate of inflation of 17% p.a. The growth of money in year 2006, in terms of Broad Money Supply, (M 2 ), was 20.7% and the country recorded a real growth of GDP of 7.4%. The purpose of this article is to discuss the underlying relationships between money, inflation and the economic growth with supporting concepts and empirical evidence based on Sri Lankan context. A large volume of data for the period 1950 to 2007 have been analyzed to support the observations. In the context of the scope of this paper there appears several interesting relationships either affirming the theories and concepts or disputing popular myths. The research limitations are stated elsewhere in the paper and the author expects this paper to be a framework and basis for further research which will be useful for the analysis of the nitty-gritty within the broader issues. 2. Inflation - What is it? Inflation is the rate of increase of the general price level. Inflation is measured in terms of changes in price indices. Such an index would indicate the relative cost of a specified basket of goods and services over time, compared with the cost of such basket of goods and services during a particular (base) year. In Sri Lanka there are several price indices calculated by the Central Bank of Sri Lanka and the Department of Census and Statistics. Few main indices are Colombo Consumer Price Index (CCPI) which is the key index quoted for inflation reporting, Seasonally Adjusted CCPI, Colombo District Consumer Price Index (CDCPI), Sri Lanka Consumer Price Index, (SLCPI) and Wholesale Price Index (WPI). Senior Deputy General Manager - Seylan Bank PLC