Inflation hits 13-month high as supply shocks disrupt price stability

The consumer inflation measured by Colombo Consumer Price Index (CCPI) continued its upward trajectory in May 2026, reaching a 13-month high and remaining above Central Bank’s medium-term target. 

The CCPI based headline inflation accelerated to 5.5 percent year-on-year in May, up marginally from 5.4 percent recorded in April. This current inflationary environment stands in stark contrast to the deflationary period witnessed just a year prior, when the CCPI dipped to negative 0.7 percent in May 2025.

In response to these growing price pressures, the Monetary Policy Board of the Central Bank of Sri Lanka (CBSL) raised the Overnight Policy Rate (OPR) by 100 basis points to 8.75 percent on May 26. While the tightening measure was widely anticipated by the market, some economists argue that an earlier policy rate hike in March or April could have preempted the sharp breach of the 5.0 percent target. Critics suggest that an earlier intervention might have captured the inflationary momentum before the second-round effects of energy price adjustments fully trickled down into the broader economy.

The primary catalyst for the current inflationary pressure stems from the non-food sector, heavily influenced by external geopolitical volatility. Non-food inflation accelerated sharply to 7.8 percent in May from 6.8 percent in the previous month. The CBSL attributed this surge to upward adjustments in domestic energy prices, which were necessitated by elevated global petroleum costs arising from heightened and ongoing tensions in the Middle East. On a month-on-month basis, the CCPI recorded a 0.9 percent increase in May, with the non-food category contributing 0.6 percentage points to this rise. This monthly increase was largely driven by price hikes in sub-categories such as housing, water, electricity, gas, and transport.

The momentum for these non-food increases was already evident in April, which saw a steep month-on-month jump of 3.0 percent in the index, signaling to policymakers that the price increases were part of a persistent upward march rather than transitory anomalies. 

In a contrasting trend that provided some relief to consumers, food inflation decelerated significantly during the same period. Food inflation year-on-year dropped to 0.9 percent in May 2026, down from 2.8 percent in April. 

Despite this moderation in food prices, underlying price pressures in the broader economy continued to simmer, as evidenced by core inflation edging up to 3.9 percent in May from 3.8 percent in the preceding month. The overall economic environment has also seen renewed demand conditions, reflected in continued private sector credit expansion and a widening merchandise trade deficit driven by increased fuel import expenditures.

Looking ahead, the domestic inflation outlook remains clouded by elevated uncertainty linked to the fluid nature of the Middle East conflict and its wide-ranging spillovers into global and domestic economic activity. 

The central bank’s staff projections indicate that headline inflation is highly likely to remain above the 5.0 percent target line in the immediate quarters ahead, driven by the fluid nature of international commodity markets. 

The accompanying inflation fan chart illustrates a wide band of uncertainty surrounding these near-term projections, suggesting that any further disruptions to global supply chains could lead to notable upward deviations. 

Nevertheless, the baseline model projects that the recent contractionary monetary stance, alongside the cooling of domestic demand, will successfully anchor inflation expectations, eventually steering headline figures back down to stabilise around the 5.0 percent target over the medium term. (NF)