The Central Bank of Sri Lanka (CBSL) anticipates that deflationary trends will continue in the coming months before inflation gradually aligns with the medium-term target of 5.0 percent. Administratively determined price cuts and improved supply conditions are expected to keep consumer prices under downward pressure.
In September, Sri Lanka experienced its first dip in consumer prices in nearly 30 years, with a 0.5 percent decline in Colombo district prices. This drop was driven by lower prices for food staples and reductions in fuel, electricity, and water tariffs. The government’s repeated cuts to these administratively determined prices filtered through supply chains, contributing to broader price declines.
Food prices, in particular, decreased due to improved supply conditions and lower energy costs, which helped reduce overall prices through supply chains. What was initially viewed as a temporary trend now seems likely to persist, as price cuts across many commodities have continued since the new president took office.
An additional energy price reduction at the start of October is expected to lower prices further across the economy. The CBSL forecasts that headline inflation will remain significantly below the 5 percent target in the coming months, with deflation possibly continuing for a short period.
Although persistent deflation can discourage consumer spending and slow economic growth, CBSL believes that Sri Lanka’s current situation differs from typical deflationary challenges. After experiencing hyperinflation in 2022 and 2023 due to soaring global energy prices and a depreciating rupee, the recent deflation may help restore some lost purchasing power for consumers and improve living standards as the economy recovers.