FINANCIAL CHRONICLE – According to the central bank of Sri Lanka, headline inflation has risen significantly and is expected to stay above the target rate of 5 percent in the near future before beginning to decline.
The Central Bank of Sri Lanka’s (CBSL) Monetary Policy Report for August 2026 also indicates that core inflation is likely to rise, approaching the headline inflation target.
The report highlights a challenging and unpredictable external landscape, particularly due to intensified geopolitical conflicts in West Asia that have been ongoing since late February 2026, which have had repercussions for the local economy.
Headline inflation, which averaged approximately 2% in the first quarter of 2026, has surged since then, surpassing the target. This increase is primarily attributed to the immediate impact of rising global energy prices on domestic fuel and energy costs, as well as the subsequent effects on other sectors.
The CBSL noted that the inflation surge is predominantly driven by supply-side factors. It forecasts that headline inflation will likely remain high and exceed the target in the short term, eventually stabilizing as the recent supply shocks diminish and the effects of tighter monetary policy start to influence the broader economy.
This inflation prediction is based on the expectation that tensions in West Asia will ease, reducing their economic repercussions.
The Colombo Consumer Price Index, which reflects quarterly headline inflation, averaged 5.9 percent in the second quarter of 2026, marking the end of an eight-quarter period where inflation consistently fell below the target by a significant margin as defined in the Monetary Policy Framework Agreement (MPFA).
However, the outlook for inflation remains precarious, with risks skewed to the upside in both the short and medium terms, driven by significant uncertainty in global commodity markets and the potential for adverse weather events linked to El Niño.
Despite these challenges, inflation expectations are generally expected to stay anchored around the target in the medium term.
The central bank tightened its monetary policy in May 2026 in response to the rising inflation outlook, marking a departure from the accommodative monetary stance that had been in effect since mid-2023. This decision aims to control inflation and prevent the risk of unanchored inflation expectations.
Inflation related to energy and transportation increased in the second quarter of 2026 due to adjustments in fuel, electricity, and liquefied petroleum gas prices, and is anticipated to remain high in the near future.
Weather-related uncertainties are also expected to impact energy inflation by driving up electricity generation costs.
Food inflation is projected to stay elevated in the short term, with significant increases in volatile food prices noted in June 2026, particularly for items like vegetables and fish, along with higher transportation costs, which are likely to increase food inflation pressures.
The volatility of food inflation is subject to weather-related uncertainties, which could result in greater-than-expected price fluctuations.
Continued geopolitical tensions and their implications for the global economy, including renewed commodity price fluctuations, trade disruptions, a slowdown in global demand, and potential adverse weather conditions, could further impact economic activity domestically in the coming period, the CBSL stated. (Colombo/Aug14/2026)
