Inflation target: 5% achievable if oil moderates, food supply stabilises

Sri Lanka may reach its 5% inflation target in H2 2027 if oil prices moderate and food supply remains stable, SenFin Securities said in a recent report on Sri Lanka’s 5% inflation target, listing Brent crude below $ 90 per barrel and monthly core CCPI remaining near 5% as indicators to watch rather than formal triggers.

“Inflation may ease towards 5% in H2 2027 if oil prices moderate and food supply remains stable,” the report said.

“Monthly core CCPI remaining near 5% signals persistent underlying inflationary pressures and poses a risk to price stability.” The report treated this as a risk signal to monitor, not as a formal policy trigger.

In September, headline inflation reached 8.0%, while core inflation rose to 5.4%, up from 2.3% in January, according to the report. The Q3 2026 average stood at 7.8%, above the 7% upper accountability margin. The report noted that Q3 2026 was the first quarter above 7%, after eight straight quarters below 3% from Q2 2024 to Q1 2026.

The report also noted that food inflation rose from 0.9% to 8.5% between May and August, with the CBSL attributing August’s sharp increase mainly to a base effect.

The report noted that Brent crude moved back above $ 100 in October, while listing prices below $ 90 and normalising Hormuz traffic as key thresholds to watch for inflation to ease.

The report also noted the likelihood of El Nino-related challenges delaying the eventual return of inflation towards the expected target in 2027. “El Niño could delay the return to target until late 2027 or 2028.” It estimated that El Niño could raise food inflation by 5-7 percentage points over 12-18 months and add 1.25-1.75 percentage points to headline inflation, given food’s 25% weight in the CCPI, potentially delaying price stability into 2027–28.

The report, acknowledging that the 5% target may be achieved, noted the likelihood of inflation staying around 8% in 2026, with a two-quarter breach of the 7% upper accountability margin set by the Central Bank in the Monetary Policy Framework Agreement (MPFA) likely.

It noted that 5% is a point target with a ±2 percentage-point accountability margin, meaning the range is 3-7%, and that two consecutive quarters outside that range would trigger a report to Parliament.

“Inflation stays about 8%; a two-quarter breach of the 7% margin is likely.” It also noted that under the positive conditions mentioned, inflation may eventually converge with the target range of 3-7% by Q2 2027.