Sri Lanka's key inflation rises to 6.4% in January on higher sales tax

Sri Lanka's key inflation rate in January accelerated to 6.4% from 4% in December, the statistics department said on Wednesday as prices were driven upwards by bad weather and a tax increase.
 

The Colombo Consumer Price Index, a leading indicator for broader national prices, tracks inflation in Colombo, Sri Lanka's biggest city.
 

Food prices rose 3.3% in January from 0.3% in December, the Department of Census and Statistics said in a statement.

Prices for non-food items rose 7.9% in January from 5.8% year-on-year in December.
 

Sri Lanka increased its Value Added Tax (VAT) from 15% to 18% from the beginning of the year, in an effort to meet government revenue targets set under a $2.9 billion International Monetary Fund (IMF) bailout.
 

Food prices were also higher due to heavy rain reducing vegetable harvests.
 

The country's central bank estimates the VAT increase could result in inflation spiking 2%-3% but the hike is expected to be temporary.
 

Inflation is likely to return to the 4%-6% band targeted by the central bank in the medium term largely because demand remains low, analysts said.
 

"This is largely in line with expectations. Inflation should start decreasing from next month," said Shehan Cooray, head of research at Acuity Stockbrokers.
 

"With global oil prices increasing there could be pressure from an increase in fuel prices but overall inflation should return to below 5% by March or April barring any major shocks." Sri Lanka racked up record high inflation that peaked at 70% in September 2022 after its economy was pummelled by the worst financial crisis in decades, triggered by a plunge in foreign exchange reserves.
 

The Central Bank of Sri Lanka (CBSL) kept its rates unchanged earlier this month to control inflation after cutting interest rates by 650 basis points since it started an easing cycle in June 2023 to help fuel an economic recovery from recession last year.