Sri Lanka's key inflation index rises to 7.3% in July, highest in three years

COLOMBO: Sri Lanka’s key inflation index rose 7.3% year-on-year in July, after posting a 6.8% rise last month, the Statistics Department said on Friday, marking the biggest increase in three years driven by growing energy prices.

The Colombo Consumer Price Index, a leading indicator for broader national prices, tracks inflation in Sri Lanka’s commercial capital and is followed by the Central Bank of Sri Lanka to help set policy rates.

Food inflation rose to 6.3% in July from 3.6% year-on-year in June, while the non-food category was 7.8% compared with 8.4% last month, the latest data showed.

Sri Lanka is recovering from a severe financial crisis caused by a shortfall of foreign reserves four years ago, supported by a $2.9 billion programme from the International Monetary Fund. Inflation at that timepeaked at 70%, but has gradually declined since.

This is the highest the island nation’s inflation has reached since June 2023 when it hit 12%, data from the census department showed.  CBSL has set a inflation target of 5% and expects inflation to gradually reduce in the medium term.

S&P affirms Sri Lanka’s ratings at CCC+/C with ‘stable’ outlook

“This is on the dot. 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%,” said Ranjan Ranatunga, vice president research at First Capital.

“This increase is mainly due to higher fuel prices being transmitted to all areas of the economy, especially higher food and transport prices. Annual average inflation is expected to be 6.1%.”

Sri Lanka’s inflation stood at 2.2% in March, but began to climb largely due to soaring fuel prices caused by the Iran war, which forced it to raise 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. Rapidly rising inflation prompted the Central Bank of Sri Lanka to raise its key policy rate by 100 basis points to 8.75% in May. But the results of the hike are expected to take about four months to filter through to markets, analysts said.