Food prices have been increasing sharply since 2003. In the globalized world, the transmission of global food
price increases to domestic market determines the decision of economic agents and policy makers of a domestic
economy. The recent growth of global food prices affects the welfare of poor consumers and producers. In Sri
Lanka, large segment of the population spends more than 50 percent of their income on food. Thus, this study
investigates and assesses how international food price surge affects domestic inflation process in Sri Lanka. The
empirical statistical results are derived by using a battery of parametric and non-parametric econometric
techniques using monthly data of price series for the period from 2003M1 to 2013M12. The co-integration
analysis results confirm that global food prices, domestic prices are co-integrated. Therefore, Sri Lankan
government needs to develop a safety net program for the poor and a longer term poverty reduction strategy.
Policy attention needs to shift towards efforts to increase food production. The results of this study have various
policy implications for monetary policy, food and agricultural policy and trade policy for Sri Lanka.