Sri Lanka’s Colombo Consumer Price Index based inflation back in positive territory

HEADLINE inflation, as measured by the Colombo Consumer Price Index (CCPI), returned to positive territory in August 2025, recording 1.2% (YoY) (Figure 1).

- By PaTALEE HETTIARACHCHI AND GAGANA KULATHUNGA

This marks the end of a deflationary phase that lasted nearly a year. CCPI based headline inflation slipped into negative territory in September 2024 and remained negative for 11 consecutive months. The lowest point was reached in February 2025, recording a deflation of 4.2%. The deflationary trend gradually eased from March 2025 onward, culminating in a turnaround by August 2025 with headline inflation reaching positive levels.

While the recent deflation was driven by supply-side factors, prolonged period of deflation is not conducive to economic recovery. Accordingly, the return of inflation to positive levels is a significant milestone in Sri Lanka’s progress towards achieving and maintaining the 5% inflation target. This article aims to examine the drivers of the deflationary episode, the factors behind the recent recovery, and the implications for monetary policy and the broader economy. It also reviews core inflation dynamics, differences between CCPI and NCPI, and the policy response of the Central Bank, providing a comprehensive picture of the inflation landscape.

In foreign exchange liquidity, easing global commodity prices and improved domestic supply conditions led to a rapid disinflationary process. By mid-2023, inflation had fallen to single digits supported by appropriate policies in a period of less than one year from the peak inflation in 2022.

Thereafter headline inflation broadly stabilised around the target of 5% during the second half of the year.

From disinflation to deflation (2024-2025)

Following a brief uptick in inflation at the beginning of 2024, driven by VAT amendments, substantial reductions in administered prices — electricity tariffs, petroleum and gas prices triggered a fresh decline in inflation. Combined with favourable statistical base effects, these reductions eventually pushed the economy into deflationary territory by September 2024, where it persisted until July 2025.