Key Takeaways
- Sri Lanka’s key inflation index rose to 7.3% year-on-year in July.
- The increase is mainly due to higher fuel prices and food costs.
- Central Bank of Sri Lanka expects inflation to peak at 8.7% in November.
Sri Lanka’s key inflation index rose to 7.3% year-on-year in July, marking the highest increase since June 2023 when it hit 12%, according to data from the Statistics Department.
The Colombo Consumer Price Index, a leading indicator for broader national prices, showed that food inflation increased to 6.3% in July from 3.6% year-on-year in June, while non-food categories saw an increase of 7.8% compared with 8.4% last month.
The Central Bank of Sri Lanka (CBSL) has set a target of 5% inflation and expects it to gradually reduce over the medium term, but analysts predict that inflation will continue to rise in the coming months, peaking at 8.7% in November.
Ranjan Ranatunga, vice president research at First Capital, stated, 'We don’t see inflation coming down. In fact we see it continuing to rise in the coming months and peaking in November at 8.7%.'
The increase is mainly due to higher fuel prices being transmitted to all areas of the economy, especially food and transport costs. Analysts attribute this to soaring fuel prices caused by the Iran war, which forced Sri Lanka to raise its fuel prices by about 35%, introduce fuel rationing, and declare Wednesday’s public holidays to manage consumption.
Higher global prices also affected Sri Lanka’s foreign reserves, reducing them by 6.3% to $6.4 billion in June. This rapid rise in inflation prompted the CBSL to raise its key policy rate by 100 basis points to 8.75% in May.
However, the results of this hike are expected to take about four months to filter through to markets, according to analysts.
S&P affirmed Sri Lanka’s ratings at CCC+/C with a ‘stable’ outlook, indicating that despite the current economic challenges, the country is on track for gradual recovery.
'We don’t see inflation coming down. In fact we see it continuing to rise in the coming months and peaking in November at 8.7%.'
Ranjan Ranatunga, Vice president research, First Capital
