Highest month-on-month decline
In April 2023, the rate of inflation in Sri Lanka fell by 15% compared to the previous month, according to the Colombo Consumer Price Index (CCPI). The CCPI indicated that inflation was 35.3% in April YoY compared to 50.3% in March. This marked the highest monthly decline in the CCPI series since its inception in 2021. The decrease in inflation was primarily due to unexpected price drops in volatile food and non-food items.
Food inflation fell from 47.6% in March 2023 to 30.6% in April 2023, while non-food inflation fell from 51.7% to 37.6% during the same period. Core inflation, which measures underlying inflation in the economy, also decreased from 39.1% in March 2023 to 27.8% in April 2023.
Experts believe that this trend of declining inflation is expected to continue throughout 2023, eventually reaching single-digit levels by late 2023. This process is supported by tight monetary and fiscal policies, normalisation of supply conditions both globally and domestically, greater pass-through of lower global commodity prices, and favourable statistical base effects.
Inflation projections need to be readjusted
Inflation projections in Sri Lanka need to be readjusted due to prevailing economic uncertainties and geopolitical tensions. The inflation fan chart, which depicts the baseline projections using confidence bands of gradually fading colours, highlights the significant risks associated with the current projections.
Possible downside risks include the second-round effects of recent fuel and gas price revisions, faster normalisation of supply bottlenecks, easing of world commodity prices, and softening of imported inflation. On the other hand, potential upside risks include the second-round impact of recent upward revisions to electricity tariffs and potential demand pressures with the expected revival of activity.
Experts emphasize the need for caution when relying on inflation projections, especially during these uncertain times. They suggest that policymakers should adopt flexible and responsive measures to mitigate any potential risks to the economy.