Sri Lanka’s consumer inflation in Colombo is beginning to show signs of resurgence after a long period of stability, raising new questions about the sustainability of monetary policy as food prices rise. While overall inflation remains subdued on a year-on-year basis, short-term price pressures—particularly from the food sector—have begun to mount, complicating the Central Bank’s policy outlook.
According to the Department of Census and Statistics, the Colombo Consumer Price Index (CCPI) rose by 0.9 percent in June 2025, following a 0.8 percent increase in May. This recent uptick is largely driven by rising food prices, with the food sub-index increasing by 1.8 percent in June to reach 249.3 points, after a sharper 2.7 percent rise the previous month.
Although prices have been on the rise in the short term, consumer inflation over the past 12 months actually recorded a deflationary trend of -0.6 percent. This paradox highlights the uneven nature of Sri Lanka’s post-crisis recovery. Over the past 33 months since monetary stability was restored around September 2022, consumer prices in Colombo have only risen by 3.6 percent—an unusually low figure given the volatility experienced during the economic crisis that preceded this period.
The food sub-index has increased by just 0.9 percent since September 2022, signaling that while price pressures are currently intensifying, they remain moderate compared to historical norms. Nonetheless, the sharp climb in vegetable prices and other staples in recent weeks has stoked fresh concerns among consumers and policymakers alike.
The Central Bank of Sri Lanka (CBSL) is currently targeting an inflation range of 5 to 7 percent, though actual inflation has remained below this level for several months. Despite high levels of excess liquidity in the money market, inflation has remained in check due to disciplined monetary and exchange rate policies. The rupee has remained stable, and interest rates have gradually declined as the government reduced domestic borrowings.
Economists note that the CBSL’s success in preserving capital and preventing currency depreciation has been a key factor in maintaining price stability. However, recent monetary easing—particularly the most recent policy rate cut—has raised caution. While it was not directly inflationary, given weak private credit demand and the mid-corridor signaling, some analysts warn that further loosening may carry risks if not aligned with underlying economic fundamentals.
Historically, Sri Lanka maintained inflation on par with the United States up until 1978. However, subsequent changes to the central bank’s operating framework led to recurrent inflation spikes. Since the deflationary turn in 2022, these “anchor conflicts” have been largely muted, and stability restored.
Nevertheless, with inflation creeping up and food prices leading the charge, the CBSL may soon face a delicate balancing act—sustaining growth without igniting inflation.
