 "Higher sales tax drives Sri Lanka inflation to 6.5% in January, shows data")
Sri Lanka's consumer price inflation rate accelerated to 6.5% in January year-on-year from 4.2% in December, official data showed on Wednesday, driven by a higher sales tax needed to meet targets set under a $2.9 billion IMF programme.
The National Consumer Price Index (NCPI) captures broad retail price inflation and is released with a lag of 21 days every month.
Food prices rose 4.1% on the year from 1.6% in December, the Department of Census and Statistics said in a statement.
Prices for non-food items increased 8.5% last month from 6.3% in December.
Sri Lanka racked up record 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.
It 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, which was finalised last March and helped the island nation tackle inflation, rebuild reserves and stabilize its currency.
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Food prices were also boosted by heavy rain reducing vegetable harvests in January.
"We are not too concerned. This is a temporary hike because of the VAT increase," said Shehan Cooray, head of research at Acuity Stockbrokers.
"It should start tapering off from March onwards because of the high base effect, normalization of prices and subdued demand."
Sri Lanka's central bank expects inflation to return to the government's 5% target from the last two quarters of the year.
The Central Bank of Sri Lanka (CBSL) kept its interest rates unchanged last month to control inflation after cutting them by 650 basis points since it started an easing cycle in June 2023 to help fuel an economic recovery from recession last year.
The CBSL, which committed to maintaining inflation at 5% under a new act introduced last year, said price increases from the tax hike were unlikely to persist due to subdued demand and the economy operating below its full capacity.