BENGALURU/COLOMBO: Sri Lanka’s key inflation rate fell to 0.5% in August on the year from 2.4% last month, the statistics department said on Friday.

The Colombo Consumer Price Index, a leading indicator for broader national prices, tracks inflation in Colombo, the biggest city.

Prices in the food category decreased 0.8% in August on the month from 1.5% in July, while in the non-food category they also fell 0.4% in August on the month from 2.8% in July.

A drop of 22.5% in electricity costs in July helped August inflation, analysts said, along with downward price adjustments to fuel, water and cooking gas.

Demand is expected to stay muted in the approach to the crucial presidential election on Sept. 21.

“Almost everyone has suspended taking spending and investment decisions. Everything has come to a halt because of the political and policy uncertainty,” said Dimantha Mathew, research head at First Capital Holdings PLC.

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“Even in the month of September we will see this lack of demand in the system.”

Inflation is projected to remain about 2 percentage points below the central bank’s target of 5% for the next seven months due to lower prices of power, fuel and food, a recent monetary policy report said.

Sri Lanka suffered record inflation after its worst financial crisis in decades pummelled the economy, which has stabilised since the island nation won a $2.9-billion bailout from the International Monetary Fund (IMF) in March 2023.

The central bank expects the economy to grow 3% in 2024 after lst year’s contraction of 2.3%.