Colombo inflation hits -2.1% as deflation deepens in November 2024

Inflation in the Colombo district continued to decline, entering deeper into deflation in November 2024, as projected by the Central Bank of Sri Lanka (CBSL) last week.

Non-food prices fell sharply, while food prices slowed compared to October.

Key Highlights:

1. Annual Inflation Rate:
   • Colombo Consumer Price Index (CCPI), Sri Lanka’s main inflation indicator, fell by 2.1% in the year through November 2024, compared to a 0.8% decline in October.
   • This marks the third consecutive month of deflation, which CBSL expects to persist through most of the first half of 2025.
2. Monthly Price Changes:
   • Prices fell by 0.3% in November compared to October, extending the decline for the fifth consecutive month.
3. Factors Contributing to Deflation:
   • Significant cuts to fuel prices, electricity, and water tariffs played a major role in lowering costs. These same elements drove inflation to 70% two years ago when state subsidies were removed.
   • Reduced transport costs, including lower bus and three-wheeler fares, eased household expenses.
4. Sectoral Inflation Trends:
   • Non-Food Basket:
     • Annual prices fell 3.3% in November, faster than the 1.6% decline in October.
     • Monthly prices declined 0.3%, compared to a 0.5% drop in October.
   • Food Basket:
     • Annual food inflation slowed to 0.6% in November, down from a 1.0% increase in October.
     • Monthly food prices decreased by 0.1%, compared to a 0.6% drop in October.
   • Core Inflation (excluding food, energy, and transport):
     • Core prices rose 2.7% in November, down from 3.0% in October, indicating further easing in underlying inflation.
5. Policy Implications:
   • CBSL cut its Overnight Policy Rate by 50 basis points last week, setting it at 8.00%. This aims to boost demand and bring inflation back to the 5.0% target by late 2025.

Broader Impact:

While the deflation has eased household budgets, it followed significant hardship from past inflation spikes. Businesses, particularly small ones, faced challenges, and many households had to reduce electricity usage dramatically due to high tariffs. The adjustments, however, allowed state energy companies to achieve substantial profits and helped stabilize the government budget.

This report underscores the CBSL’s efforts to manage inflation and stimulate economic activity while aiming for price stability in the long term.