Inflation climbs above 5% as price pressures broaden

• NCPI-based headline inflation rose to 5.4% YoY in May, from 4.7% in April
• Food inflation increased to 1.5%, from 1.1%, while non-food inflation climbed to 8.6%, from 7.8%
• 5.4% headline inflation rate, non-food items contributed 4.7 percentage points, compared with just 0.7 percentage points from food

Inflation accelerated for a third consecutive month in May, reaching the Central Bank’s medium-term target range, as the rising food prices combined with the persistent increases in the energy-related and service sector costs.

The National Consumer Price Index (NCPI)-based headline inflation rose to 5.4 percent year-on-year (YoY) in May, from 4.7 percent in April, according to the data released by the Census and Statistics Department yesterday.

Food inflation increased to 1.5 percent, from 1.1 percent, while non-food inflation climbed to 8.6 percent, from 7.8 percent.

The latest reading is a turnaround from the disinflationary environment seen earlier this year, when headline inflation fell as low as 1.1 percent in February, before steadily climbing through March, April and May. 

Core inflation, which strips out the volatile food, energy and transport items, edged up to 4.5 percent, from 4.4 percent, suggesting the underlying price pressures are also beginning to firm.

The increase comes less than a month after the Central Bank raised its overnight policy rate by 100 basis points to 8.75 percent, citing the risks from the higher global oil prices, rapid private sector credit growth and external uncertainties linked to the geopolitical tensions in the Middle East.

The composition of inflation indicates that the non-food categories continue to be the dominant driver of price growth. Of the 5.4 percent headline inflation rate, the non-food items contributed 4.7 percentage points, compared with just 0.7 percentage points from food.

The transport costs expanded during the month, due to the higher petrol prices, while increases were also recorded in housing and utilities, particularly the LP gas, as well as the restaurants and hotels, clothing and household maintenance categories.

The food prices, meanwhile, were pushed higher by the increases in vegetables, fresh fish, onions, dried fish, milk powder and dairy products. However, the rise was partially offset by the declines in the rice, coconuts, eggs, potatoes, sugar and coconut oil prices.

While food inflation remains relatively subdued by the historical standards, non-food inflation has now exceeded 8 percent for two consecutive months, indicating a stronger domestic demand and the pass-through effects of higher operating costs across the economy.

The latest inflation reading also places Sri Lanka almost exactly at the Central Bank’s targeted 5 percent inflation objective.

For the businesses and households, the concern is less the headline figure itself than the composition of inflation. The rising transport, utility and hospitality costs tend to have a wider impact on consumer spending and corporate margins than the fluctuations in individual food items, potentially influencing the wage demands, pricing decisions and investment plans.