Sri Lanka’s Consumer Inflation Rate Drops To 4.6% In July, Boosted By Falling Food Prices

21-8-2023 (COLOMBO) Sri Lanka’s consumer inflation rate witnessed a significant decline, dropping to 4.6% year-on-year in July, according to the statistics department. This decrease was primarily driven by a decrease in food prices. The National Consumer Price Index (NCPI), which measures broader retail price inflation, is released with a 21-day lag each month. In June, consumer inflation stood at 10.8%.

The Department of Census and Statistics stated that food prices experienced a 2.5% decline in July compared to the previous year when they had risen by 2.5% in June. On the other hand, prices for non-food items increased by 10.9% in July, following an 18.3% rise in June year-on-year.

Since June, Sri Lanka has witnessed a significant drop in inflation levels, primarily due to the statistical base effect. Additionally, a stronger rupee currency has contributed to the decline by reducing the costs of fuel, power, and imported food.

Sri Lanka’s $2.9-billion bailout package received from the International Monetary Fund (IMF) in March has helped replenish foreign reserves, which had reached record lows in early 2022, leading to the country’s worst financial crisis in over seven decades.

Udeeshan Jonas, chief strategist at equity research firm CAL, expects inflation to remain below 5% due to the high base effect. He believes that there won’t be significant demand-side pressures in the coming months that could drive inflation up.

Encouraged by the faster-than-expected easing of inflation, Sri Lanka’s central bank reduced policy rates by a total of 450 basis points in June and July this year. This followed a record increase of 1,050 basis points between April 2022 and March this year.

Analysts anticipate that the Central Bank of Sri Lanka (CBSL) will maintain the rates unchanged at an upcoming meeting on Thursday. However, they believe that the bank may continue to ease interest rates later in the year to stimulate growth.

Despite these efforts, the crisis-battered Sri Lankan economy is still projected to contract by 2% in 2023, following a 7.8% contraction in the previous year.