Current deflationary conditions to persist for some time – CBSL

The Central Bank expects the consumer prices to continue to decline in the next few months, before gradually aligning with and remaining around the medium-term target level of 5.0 percent, as the administratively determined prices and improved supply conditions would put downward pressure on the general prices.
Sri Lanka saw its first dip in consumer prices in nearly 30 years in September, when the Colombo district prices fell by 0.5 percent, due to the lower prices in food staples and also the cuts to fuel, electricity and water tariffs.
Before the release of the September inflation print, the government delivered repeated cuts to these administratively determined prices, which then got trickled down into supply chains elsewhere.
The food prices in particular saw declines, due to the improved supply conditions in the last couple of months and then the lower energy prices added further downward pressure on their prices, through their supply chains.
What initially appeared as a temporary phenomenon, now looks more persistent for some time, due to the slew of cuts to the prices of many commodities since the new president came to power.

The energy price cut again at the start of October will reverberate through all corners of the economy, making possible lower prices elsewhere.
“Looking forward, headline inflation is expected to remain notably below the 5 percent target in the forthcoming months, while deflation could continue for a few months, driven by changes to administratively determined prices and easing of supply conditions,” the Central Bank said.
While persistent deflation is not desirable for an economy, due to the tendency of the people to defer their purchasing decisions, which will become a drag on the economy, as seen from what Japan went through until recently, what Sri Lanka is going through is much different and the people may welcome some reversal in the prices.
Sri Lanka went through hyperinflationary conditions in 2022 and through much of 2023, due to a combination of factors from the soaring global energy and commodities prices, which were then exacerbated by the nearly 80 percent decline in the value of the rupee before the higher taxes further sent the prices of commodities higher.
Therefore, some amount of deflation, which would undo some of the sharp price increases that took place in the last few years, will bode favourably in getting the consumers to reclaim part of the spending power they lost in the recent past and catch up with the lifestyles they had a few years ago, with the rising incomes, in line with the ongoing recovery in the economy.