December inflation records 2% YoY dip, extending deflationary trend to fourth consecutive month

Sri Lanka’s National Consumer Price Index (NCPI) recorded a 2.0 percent year-on-year decline in December 2024, extending the deflationary trend to its fourth consecutive month. 

While the overall trend shows a dip, the national prices measured every month rose by 1.1 percent in December, picking up from a 0.1 percent increase in November as the prices of nearly every item in the food basket used to measure the inflation rose, with the largest increases seen in vegetables, coconuts, and rice, further validating the economic and political discourse taking place among the Sri Lankans every day.

Core inflation, which excludes volatile food, energy, and transport, softened to 1.3 percent year-on-year in December, down from 1.5 percent in November. Policymaking mostly uses core inflation rather than headline inflation as it better reflects the underlying price pressures in the economy.

The Central Bank which has maintained price stability as its core mandate maintained that they expect the current stretch of negative year-on-year prices to continue at least through the first half of the year before aligning with its 5.0 percent medium-term desired level in the back half of 2025.

The Central Bank effectively cut its key policy rate by 50 basis points for the last time last November as the cooler prices gave them more room to relax its monetary policy further so that they could energise the economy through more demand by making credit cheaper, which will eventually bring the inflation up to the desired level.
However, the current stretch of deflation is most welcome after the Sri Lankan consumer was hammered by runaway inflation for a couple of years through mid-2023.

The national food inflation meanwhile accelerated to 2.6 percent in December 2024 from a month ago reflecting the aforementioned escalation in the key commodities.

However, the prices were still down by 1.0 percent in the year through December 2024 which says that the food prices were still cheaper by 1.0 percent compared to where they were in December 2023.

Meanwhile, the non-food inflation continued its decline as the prices fell by 0.1 percent in December from a month ago while the prices measured annually fell 2.9 percent, slightly decelerating from a 3.1 percent decline through November 2024.

The repeated cuts to fuel helped to bring the non-food prices down and so did the prices of food and commodities as cost of fuel plays a significant role in determining the prices of goods.

 The 20 percent average cut to electricity tariffs which came into effect from last week could further bring down the prices in both goods and services and would be better reflected in February price indices.