Uptick in inflation likely due to VAT

A temporary uptick in inflation is likely in the near term mainly due to the proposed value added tax (VAT) increase and its possible second-round impact, a press release issued by the Central Bank on December 29th said.

However, it said that Inflation is expected to stabilise around the targeted level of 5% over the medium term, supported by appropriate policy measures and well-anchored inflation expectations.

The report further said:

Headline inflation, as measured by the year-on-year (Y-o-Y) change in the Colombo Consumer Price Index (CCPI, 2021=100)1 increased to 4.0% in December 2023 from 3.4% in November 2023. This increase in the headline inflation is mostly in line with the projections envisaged by the Central Bank of Sri Lanka (CBSL) in November 2023.

After five months of continuous deflation, the Food category recorded inflation (Y-o-Y) of 0.3% in December 2023 from 3.6% deflation (Y-o-Y) recorded in November 2023. Meanwhile, the Non-Food inflation (Y-o-Y) declined to 5.8% in December 2023 from 6.8% in November 2023. Monthly change of CCPI recorded 0.89% in December 2023 due to the combined effect of price increases of 1.16% observed in items of Food category and price decreases of 0.27% observed in the items of Non-Food category. The core inflation (Y-o-Y), which reflects the underlying inflation in the economy, decreased to 0.6% in December 2023 from 0.8% in November 2023.