by Sanath Nanayakkare

The Central Bank forecasts the headline inflation to remain negative in the next few months, deeper than previously projected, but expects it to turn positive thereafter and gradually align with the targeted level of 5% over the medium term, aided by appropriate policy measures.

Attributing larger downward adjustments in energy prices and reduction in volatile food prices to the current negative headline inflation, the Central Bank, however, is keeping its eye on upside and downside risks to inflation projections in the near to medium term.

The Bank says possible upward pressures on the headline inflation could stem from six factors; namely:

• Possible upward pressures on global food and energy prices amidst geopolitical uncertainty
• Possible realisation of demand for higher wages
• Possible adverse weather conditions that could affect agricultural production
• Any deviation from the envisaged fiscal consolidation path
• Possible rupee depreciation at higher levels
• Possible sticky global inflation due to the policy changes in the USA And in relation to downside risks to inflation projections, the Bank cites two key reasons among others, namely.
• Possible price reductions of essentials
• The sustained impact of diminished purchasing power of people

In line with the Central Bank’s near-term projections, the headline inflation remained in negative territory for the third consecutive month, recording a deflation of 2.1% in November 2024 compared to the deflation of 0.8% in October 2024.

Non-Food inflation (Y-o-Y) decelerated further to -3.3% in November 2024 from -1.6% in October 2024. Meanwhile, Food inflation (Y-o-Y) decelerated to 0.6% in November 2024 from 1.0% October 2024. On a month-on-month basis, the CCPI recorded a decline of 0.25% in November 2024 due to 0.02% reduction in the prices of items in the Food category and 0.23% reduction in the prices of items in the Non-Food category.

Meanwhile, core inflation (Y-o-Y), which reflects the underlying inflation trends in the economy, moderated further to 2.7% in November 2024 from 3.0% in October 2024.

The Island Financial Review asked the Central Bank at the press conference last week whether the continuing disinflation would have adverse impacts on production, corporate profitability and labour recruitment and hiring.

Dr. Chandranath Amarasekara- Assistant Governor, Central Bank replied,” We do not expect disinflation to continue for such a long time to have an impact on production. By the end of the second quarter next year, we will see the end of disinflation.”