Unable to deploy code using VSCode

I am getting following error while deploying code from VSCode.

Error deploying or retrieving source: The file or directory that you tried to deploy or retrieve isn't in a package directory that's specified in your sfdx-project.json file. Add this location to your "packageDirectories" value, or deploy or retrieve a different file or directory. For details about sfdx-project.json, see: https://developer.salesforce.com/docs/atlas.en-us.sfdx_dev.meta/sfdx_dev/sfdx_dev_ws_config.htm

Retrieving of code into VSCode seems to work fine but deployment throws this error.

Here is what my sfdx-project.json looks like

 {
      "packageDirectories": [
        {
          "path": "force-app",
          "default": true
        }
      ],
      "name": "XXXXXX2022",
      "namespace": "",
      "sfdcLoginUrl": "https://test.salesforce.com",
      "sourceApiVersion": "55.0"
    }

It was working fine till last week, suddenly today i seem to get this error. Anybody having similar issue?