The latest inflation rate YoY for LK, released on December 2, 2025, stands at 2.10%, unchanged from October’s reading and below the 2.50% market estimate. This figure reflects a stabilization after a volatile year marked by deflationary pressures in early 2025. The geographic scope covers the entire Sri Lankan economy, with temporal focus on the latest monthly release and comparisons to the past 12 months.

Drivers this month

• Food prices stable, contributing 0.50 percentage points (pp) to inflation.
• Energy costs moderated, subtracting -0.20 pp from headline inflation.
• Services inflation steady at 1.80% YoY, supporting overall price stability.

Policy pulse

The inflation rate remains within the central bank’s target band of 2-4%, allowing the Monetary Board to maintain an accommodative stance. The current 2.10% reading supports a cautious approach to interest rates, balancing growth and price stability.

Market lens

Immediate reaction: The LKR/USD spot rate remained stable within a narrow 0.10% range post-release, while 2-year government bond yields edged down by 5 basis points, reflecting market confidence in subdued inflation pressures.

Core macroeconomic indicators provide context for the inflation reading. GDP growth for LK is projected at 3.20% for 2025, supported by domestic demand and export recovery. Unemployment stands at 5.40%, slightly improved from 5.80% a year ago. The fiscal deficit narrowed to 4.10% of GDP in Q3 2025, reflecting ongoing government budget discipline.

Monetary Policy & Financial Conditions

The Central Bank of Sri Lanka has kept the policy rate steady at 6.50% since September 2025. Liquidity conditions remain ample, with broad money supply (M2) growing at 8.30% YoY. Inflation expectations are anchored near 3%, supporting stable financial conditions.

Fiscal Policy & Government Budget

Fiscal consolidation efforts continue, with government revenues up 7% YoY and expenditures controlled. The budget deficit target of 4% of GDP for 2025 is on track, aided by improved tax collection and restrained subsidies.

External Shocks & Geopolitical Risks

Global commodity price volatility, especially in oil markets, poses upside inflation risks. Geopolitical tensions in the Indian Ocean region could disrupt trade routes, impacting import costs. However, recent easing of supply chain bottlenecks has helped moderate inflation pressures.

Drivers this month

• Food inflation steady at 3.00% YoY, driven by stable agricultural output.
• Energy inflation declined to 0.50% YoY from 1.20% last month, due to lower global oil prices.
• Core inflation (ex-food and energy) steady at 1.80% YoY.

Market lens

Immediate reaction: The LKR currency pair (LKRUSD) showed minimal movement, while short-term government bond yields declined slightly, reflecting market confidence in stable inflation and accommodative policy.

Looking ahead, inflation in LK is expected to hover near the current 2.10% level in the near term, with risks tilted both ways. The central bank’s accommodative stance and fiscal discipline support a stable inflation environment. However, external shocks and structural factors could alter this trajectory.

Bullish scenario (20% probability)

Global commodity prices decline further, easing import costs. Domestic supply chains improve, pushing inflation below 1.50% by mid-2026. This scenario supports stronger real incomes and consumption growth.

Base scenario (60% probability)

Inflation remains stable around 2.00-2.50%, supported by balanced demand and supply conditions. Monetary policy remains steady, and fiscal consolidation continues. Moderate GDP growth sustains price stability.

Bearish scenario (20% probability)

Geopolitical tensions disrupt trade, pushing energy and food prices higher. Inflation rises above 3.50%, forcing the central bank to tighten policy. This scenario risks slowing growth and financial market volatility.

Policy pulse

The central bank is likely to maintain its current policy stance in the short term, monitoring inflation closely. Any sustained rise above 3% could trigger rate hikes to anchor expectations.

In summary, LK’s inflation rate at 2.10% YoY signals a return to price stability after a turbulent 2025. The interplay of stable food prices, moderated energy costs, and prudent macro policies underpins this outcome. However, vigilance is warranted given external uncertainties and structural challenges. Continued fiscal discipline and monetary prudence will be key to sustaining this trajectory.

Structural & Long-Run Trends

Long-term inflation trends in LK reflect gradual economic modernization and improved supply chain resilience. Structural reforms aimed at enhancing productivity and reducing import dependence will help anchor inflation expectations over the next decade.

Key Markets Likely to React to Inflation Rate YoY

Inflation data in LK typically influences currency, bond, and equity markets. The following tradable symbols historically track inflation dynamics or monetary policy shifts in Sri Lanka and related emerging markets.

• LKRUSD: The Sri Lankan rupee’s exchange rate is sensitive to inflation and central bank policy.
• COL: Colombo Stock Exchange index reflects economic growth and inflation expectations.
• CEYL: Major Sri Lankan bank, sensitive to interest rate changes driven by inflation.
• USDINR: Regional currency pair influenced by inflation trends in South Asia.
• BTCUSD: Bitcoin often reacts to inflation expectations globally, including emerging markets.

FAQs

What is the current Inflation Rate YoY for LK?

The latest inflation rate for LK is 2.10% year-over-year as of December 2025, stable from October’s reading.

How does the Inflation Rate YoY affect LK’s monetary policy?

Inflation near 2.10% supports the central bank’s current accommodative stance, with potential rate hikes if inflation rises above 3%.

What are the main risks to LK’s inflation outlook?

Key risks include global commodity price shocks, geopolitical tensions, and supply chain disruptions that could push inflation higher.

Takeaway: LK’s inflation rate at 2.10% signals a stable price environment supported by balanced macro policies, though external risks warrant close monitoring.

This has been drafted with AI assistance and then thoroughly reviewed, refined, and approved by our human editorial team to ensure accuracy, and originality.