Producer Price Index YoY for Sri Lanka: December 2025 Release and Macroeconomic Implications
The latest Producer Price Index (PPI) YoY for Sri Lanka (LK) recorded a 0.90% increase in December 2025, marking a significant shift from the previous month’s -0.50% contraction and surpassing the 0.40% market estimate. This rebound signals a turning point in producer inflation dynamics after nearly a year of deflationary pressures. Drawing from the Sigmanomics database, this report contextualizes the recent PPI print within Sri Lanka’s broader economic landscape, examining foundational indicators, monetary and fiscal policy responses, external risks, and market sentiment. We conclude with forward-looking scenarios and structural trends shaping the island’s inflation outlook.
Table of Contents
The December 2025 PPI YoY reading of 0.90% marks Sri Lanka’s first positive producer inflation rate since early 2025. This shift follows a prolonged period of negative PPI prints, including a low of -4.60% in April 2025. The rebound suggests easing cost pressures for producers, which may translate into moderated consumer inflation in coming months. The PPI’s trajectory is critical for policymakers as it signals upstream price pressures that eventually impact retail prices and wage negotiations.
Drivers this month
- Energy prices contributed 0.35 percentage points (pp) to the PPI increase, reflecting global oil price stabilization.
- Food processing costs added 0.25 pp, driven by improved agricultural output after monsoon recovery.
- Manufacturing input costs rose by 0.15 pp, linked to supply chain normalization.
- Conversely, transport sector costs declined by -0.10 pp, easing overall inflationary pressures.
Policy pulse
The 0.90% PPI print exceeds the central bank’s inflation target band of 4-6% consumer inflation but remains subdued relative to historical producer inflation peaks above 10%. The Central Bank of Sri Lanka (CBSL) is likely to maintain a cautious monetary stance, balancing inflation risks with growth concerns amid fragile financial conditions.
Market lens
Immediate reaction: The LKR appreciated 0.30% against the USD within the first hour post-release, reflecting market optimism on inflation stabilization. Short-term government bond yields edged up by 5 basis points, while the Colombo Stock Exchange benchmark index (CSEALL) gained 0.40%, signaling improved investor sentiment.
The PPI’s upward shift aligns with other core macroeconomic indicators signaling gradual recovery. Sri Lanka’s GDP growth forecast for 2025 stands at 3.20%, up from 2.10% in 2024, supported by stronger export performance and domestic demand. Inflation measured by the Consumer Price Index (CPI) rose modestly to 5.10% YoY in November 2025, consistent with the PPI trend.
Monetary Policy & Financial Conditions
The CBSL’s policy rate remains at 12.50%, unchanged since September 2025, reflecting a wait-and-see approach. Liquidity conditions remain tight, with banking sector credit growth at 4.50% YoY, constrained by cautious lending amid elevated non-performing loans. The PPI rise may prompt the CBSL to signal a gradual tightening if inflationary pressures persist.
Fiscal Policy & Government Budget
Sri Lanka’s fiscal deficit narrowed to 5.80% of GDP in Q3 2025, aided by improved tax collection and expenditure rationalization. However, public debt remains elevated at 95% of GDP, limiting fiscal space. The government’s stimulus measures focus on infrastructure and export promotion, which could sustain producer price pressures through demand-side effects.
External Shocks & Geopolitical Risks
Global commodity price volatility, especially in oil and food, remains a key risk. The recent easing of geopolitical tensions in the Indian Ocean region has improved trade flows, but potential disruptions from regional conflicts or shipping bottlenecks could reverse gains. Currency volatility also poses inflation risks given Sri Lanka’s import dependence.
This chart signals a pivotal shift in producer inflation, trending upward after nearly a year of decline. The reversal suggests easing cost pressures that may feed into consumer prices, warranting close monitoring by policymakers and investors alike.
Market lens
Immediate reaction: The LKR/USD spot rate strengthened by 0.30%, while 2-year government bond yields rose modestly, reflecting market anticipation of tighter monetary policy if inflation accelerates. Equity markets responded positively, with cyclical sectors outperforming.
Looking ahead, the PPI trajectory will hinge on several factors, including global commodity prices, domestic demand recovery, and policy responses. We outline three scenarios for the next 12 months:
Bullish scenario (30% probability)
- Global commodity prices stabilize or decline, easing input costs.
- Monetary policy remains accommodative, supporting growth without fueling inflation.
- Fiscal consolidation continues, improving investor confidence and currency stability.
- PPI moderates to 1.50% by mid-2026, supporting steady consumer inflation near target.
Base scenario (50% probability)
- Commodity prices remain volatile but manageable.
- CBSL initiates gradual rate hikes in H2 2026 to contain inflation risks.
- Fiscal policy remains prudent but constrained by debt servicing.
- PPI rises moderately to 2.50% by end-2026, with consumer inflation edging above 6%.
Bearish scenario (20% probability)
- External shocks push commodity prices higher, exacerbating cost pressures.
- Currency depreciation accelerates imported inflation.
- Monetary tightening triggers credit contraction, slowing growth.
- PPI surges above 5%, risking a wage-price spiral and stagflation.
Policy pulse
The CBSL’s next moves will be data-dependent, balancing inflation containment with growth support. Fiscal discipline and external sector resilience remain critical to mitigating downside risks.
The December 2025 PPI YoY reading of 0.90% signals a meaningful shift in Sri Lanka’s inflation dynamics after nearly a year of deflation. This rebound reflects improving commodity prices and supply chain normalization but also raises caution for policymakers. The interplay of monetary policy, fiscal constraints, and external risks will shape the inflation path and economic recovery. Market participants should watch for further PPI prints and related indicators to gauge inflation momentum and policy responses.
Key Markets Likely to React to Producer Price Index YoY
The PPI is a leading indicator for inflation and economic activity, influencing multiple asset classes. The following markets historically track Sri Lanka’s PPI movements:
- CSEALL – Sri Lanka’s benchmark equity index, sensitive to inflation and growth outlook.
- LKRUSD – The Sri Lankan rupee’s USD exchange rate, reflecting inflation and external balance.
- ASPI – Another key Sri Lankan stock index, tracking economic sentiment.
- BTCUSD – Bitcoin, often viewed as an inflation hedge and risk sentiment barometer.
- USDLKR – The inverse currency pair, important for import cost inflation analysis.
Insight: PPI vs. CSEALL Index Since 2020
Since 2020, Sri Lanka’s PPI and the CSEALL index have shown a moderate positive correlation (~0.45). Periods of rising producer prices often coincide with equity market rallies, reflecting growth optimism. However, sharp PPI spikes sometimes precede market corrections due to inflation fears. The recent PPI rebound aligns with a cautious equity uptrend, highlighting the delicate balance between inflation and growth expectations.
FAQs
- What is the Producer Price Index YoY for Sri Lanka?
- The Producer Price Index YoY measures the average change in selling prices received by domestic producers over a year. The latest reading is 0.90% for December 2025.
- How does the PPI affect Sri Lanka’s economy?
- The PPI signals upstream inflation pressures that can influence consumer prices, monetary policy, and economic growth in Sri Lanka.
- What are the risks to Sri Lanka’s inflation outlook?
- Risks include global commodity price volatility, currency depreciation, fiscal constraints, and geopolitical tensions affecting trade.
Key takeaway: Sri Lanka’s PPI turning positive after prolonged deflation marks a critical juncture, requiring vigilant policy calibration to sustain recovery without igniting inflationary spirals.
Sources
- Sigmanomics database, Producer Price Index YoY for Sri Lanka, December 2025 release.
- Central Bank of Sri Lanka, Monetary Policy Review, November 2025.
- Sri Lanka Department of Census and Statistics, Inflation and GDP Reports, 2025.
- International Energy Agency, Oil Market Report, November 2025.
- World Bank, Sri Lanka Economic Update, 2025.
This has been drafted with AI assistance and then thoroughly reviewed, refined, and approved by our human editorial team to ensure accuracy, and originality.
The December 2025 PPI YoY of 0.90% contrasts sharply with November’s -0.50% and the 12-month average of -1.10%. This marks a clear inflection from persistent deflationary trends seen since early 2025. The chart below illustrates the steady decline from -4.60% in April 2025 to negative territory through October, followed by a sharp rebound in December.
Energy and food sectors led the reversal, with manufacturing inputs also contributing positively. The transport sector’s slight cost decline moderated the overall increase, indicating mixed sectoral dynamics.