Sri Lanka’s consumer prices for the 12 months ended in September 2015 fell 0.3 percent, continuing the country’s deflation for the third month in a row, the data released by the Census and Statistics Department showed. 

The September deflation was mainly caused by the fall in the food prices as the food inflation for the same period slowed to 2.0 percent from 2.2 percent a month ago. 

The non-food inflation increased to negative 2.2 percent from negative 2.3 percent in August. 

Despite a continuous decline in the headline inflation, the key measure of inflation— the core inflation— which excludes fresh food, energy, transport, rice and coconut, rose 3.9 percent year-on-year (YoY) in August 2015, highest since August 2014. 

The core inflation in Sri Lanka has been on the up in recent times because of the inflationary pressure from the recovery in credit—21 percent YoY in July 2015—and the domestic consumption recovery after falling for the past three consecutive years. 

Meanwhile, Sri Lanka’s benchmark index used to gauge the movements in prices, the Colombo Consumer Price Index (CCPI), declined by 0.5 index points or 0.27 percent to 181.4 from 181.9 in August 2015. 

“This decrease represents an expenditure value of Rs.139.15 in the ‘Market Basket’,” the department said in a statement. 

Sri Lanka’s headline inflation has been easing due to the sharp reductions in energy costs (24 percent of CCPI basket) and improved food supply (41 percent of CCPI basket).  

Although the weakening rupee and the rising duties are expected to put pressure on the imports, the soft global commodity prices, particularly oil, are expected to partly ease the potential rise in imported inflation. 

The annual average inflation is forecasted at 1.5 percent for 2015 (increasing from 3.3 percent in 2014 and 0.7 percent in September 2015) and 4.5 percent in 2016. 

With the expectations that the Central Bank might tighten the monetary policy and the fiscal policy by the government from the November budget, the deflationary trend would likely persist.

This trend could be highly unfavourable to an economy as the European Union and Japan have been grappling for years to recover from deflation. 

The United States for the last two years has been deferring its decision to hike its policy rates, mainly due to its domestic inflation not reaching the desired levels to warrant a rate hike. 

However, India this week, shunned the markets through its 50 basis point cut in its key rates - twice the size expected by the markets – due to moderated global growth and slower global trade, while highlighting concerns about China’s economy.