Dynamics of Inflation

Historical Overview of Inflation in Nepal

The price level and its growth, inflation, is an important economic indicator. There are various indices which measure the price level, such as; consumer price index (CPI): wholesale price index (WPI); sensitive price index (SPI); gross domestic product (GDP) deflator and so on. In Nepal, there are three main price indices, namely: the CPI; the WPI; and the Salary and Wage Rate Index (SWRI). 4 The main focus for measuring the cost of living is placed on CPI. This is because CPI measures inflation impact  which is the final measure of prices on households. This chapter, therefore, overview the historical development and trend of CPI in Nepal. The chapter is broken down into three sections: the next section discusses the composition and structure of CPI in Nepal followed by historical perspectives of inflation  and decomposition of inflation trends.

NRB is the domestic authority which collects price information and construct CPI index.5 The CPI index captures the average household's consumption basket. This basket is determined by national level Household Budget Surveys (HSB). The objective of the survey is to make more representative basket in terms of cities, markets, items and weights for different commodities, income and occupation of the people.

Inflation in context of Nepal

Since some years back, Nepal is suffering from the rapidly growing inflation because of many economic and political factors. The necessity of spurting economic growth is essential for Nepal, a land-locked least developed country in south Asia. Nepal Rastra Bank report has said, Inflation in Nepal is showing no signs of easing even though the wholesale price index touched a 30-year low in neighboring country India, on which the Nepalese economy is heavily dependent. After having low inflation averaging 3.6 percent from 2000 to 2005 Nepal Rastra Bank (NRB), the country’s central bank, has come up with a staggering 13.5% inflation figure - a demoralizing fate while people are cash-strapped and having to succumb to decaying income and loss of jobs.

Year	2005	2006	2007	2008	2009	2010	2011	2012
Rate(%)	7.8	8.6	6.4	7.7	13.2	9.3	9.9	10%

Consumer Price Inflation 

The  y-o-y inflation as measured by the  consumer price index increased by  7.5percent in mid April 2012 as compared to  10.6  percent in the corresponding period of the previous  year.

Commodities	April 2011	April 2012
Food and beverage	17.3%	21.9%
Non-food and service	5.3%	10.1%
Ghee and oil	5.3%	15.6%
Milk product, and egg	16.3%	12.5%
Hotel and restaurant	15.2%	12.5%
Vegetables	61.1%	10.9%
Hard drinks	2.1%	9.2%
Tobacco products	9.0%	17.1%
Meat and fish	8.0%	6.4%
Spices	21.1%	12.3%
Cereals products	13.4%	3.0%
Transport	17.8%	11.4%
Clothing and footwear	16.9%	15.1%
Furnishing and household equipments	8.3%	13.6%
Miscellaneous goods and services	5.7%	10.8%

Region-wise, the price indices in Hill increased by 8.4 percent followed by Terai 7.8 percent and Kathmandu Valley 6.4 percent during the review period. The respective increment rates were 11.9 percent, 8.2 percent and 12.9 percent respectively in the corresponding period of the previous year. 

This data can also be graphically represented as below:

Wholesale Price Inflation 

The y-o-y wholesale price index increased by 6.6 percent during the review period compared to a rise of 11.5 percent in the corresponding period of the previous year.

Commodities	April 2011	April 2012
Imported commodities	8.8%	14.3%
Domestic manufactured	9.1%	8.1%
Agricultural commodities	13.9%	2.0%
Fruits and vegetables	28.9%	17.1%
Cash crops	9.3%	3.6%
Livestock production	12.7%	13.7%
Spices	41.0%	18.4%
Food grains	12.8%	3.1%

Under the group of domestic  manufactured commodities, the  wholesale price indices of   food-related products and beverages  and tobacco increased by  12.8 percent and 7.1 percent  respectively during the review period .Likewise, of construction  material increased by 6.1 percent during the review period. Within the imported commodities group, the wholesale price indices of petroleum products and coal and textile-related products increased by 27.8 percent and 25.0 percent respectively during the review period. The price indices of electric and electronic goods, and transport vehicles, and machinery goods are increased by 12.3 percent and 7.0 percent respectively during the review period.

Negative inflation

When most of the countries in the world are bracing themselves to face the challenges of the crisis, Nepal is experiencing an all time high inflationary situation. This is extremely worrying. If the figures published by Nepal Rastra Bank (NRB) and the survey carried out by the World Food Programme (WFP) in collaboration with other institutions are to be believed, prices are not only high but rising rapidly at the rate of 14.4 percent.

According to a survey of the market, coarse rice is being sold at Rs. 40 per kg, pulses at Rs. 85 and edible oil at Rs. 150 in Kathmandu and food items are costlier in the remote districts of the country. However, inflation affects different groups differently. Actually after Jan Andolan II, the general public had anticipated a corruption-free economy and price stability. However, the NRB, in its latest report, says that prices are still on the rise. Consequently, it will rob the poor while allowing the rich to get richer. Fixed income groups are the worst sufferers because their wages or salaries lag far behind the rising prices. A sizable segment of the general public, excluding, of course, the profiteers, believe that the existing rising prices are the result of a syndicate formed by the transporters and a cartel imposed by specific groups within the economy. Thus the popular view is that the current situation of price rise is primarily a problem of the poor and middle class, and it has been created by profiteers and hoarders.

Price Inflation

The annual inflation in 2010/11 is estimated to have remained at 9.6 percent. Wage rate increased substantially in the review period. The salary and wages index increased by 24.8 percent in mid-May 2011 compared to 13.0 percent in the corresponding period of the previous year. Under salary and wages index, the wage index increased by 32.8 percent. Among the components of wage index, index of agricultural labors, industrial labors and construction labors increased by 43.7 percent, 14.1 percent and 27.9 percent respectively.

Increasing trend in labor export has pushed the cost of production of both agricultural and industrial production on the one hand and cost of fund has also increased on the other. Lingering political transition, weak labor relation, power crisis, inadequate physical infrastructure, lack of investment-friendly environment, lower capital expenditure by the government and structural bottlenecks of the economy are the sources of low productivity.

Causes of Inflation in Nepal

The causes of inflation in our country considering the current situation are as follows:

Ø  Political Insurgency: the volatile political situation has played a vital role in the increment of all commodities. The impractical government amended rules and regulation have helped to make the situation worse. The unclear motive of government regarding economic sector also has caused the living standard of the normal citizen to degrade.

Ø  Pressure tactics: Maoist party in particular has badly hampered the economic activities of the whole country. The illegal donations, shutdown of major industries had created an imbalance in the demand and supply of goods and services.

Ø  GDP and Per capita income in decreasing trend but increase in price level: The GDP of Nepal is in decreasing trend whereas the price level is increasing yearly. As per the National Income view, the contributions to GDP have major impact on the economic aspect of the country. The increasing levels of prices add fertilizer to the increasing rate of inflation.

Ø  Natural causes: Due to flood and landslides that took place a month ago has also helped in increasing the inflation rate. The agricultural lands have been degraded due to natural calamities.

Ø  Growing concrete jungles: At present time all we see around us are concrete buildings. Fertile lands have been used for real estate purpose. If this trend goes on for a long time, we can clearly predict that the inflation rate is undoubtly going to rise especially for food items. 

Ø  High labor cost: The prices of items are also high because of the labor costs is very low mainly in terms of people who get paid on daily basis.

Ø  Transportation charges: Transport entrepreneurs have ganged up to overprice transportation costs because of rise in price of petroleum products.

Ø  Price of petroleum products: Price of petroleum products has been adjusted several times on the higher side. Such adjustments helped pushing the cost of freight and carriages and cost of other goods and services.

Ø  Transmission through trade: Furthermore, rising inflation in India is transmitted in Nepal through trade, which is one of the significant factor of increasing inflation rate of Nepal.

Ø  Seasonal constraints: Seasonal constraints also prompted to push the inflation up in the past. For example, price rise on sugar and sugar made products, vegetables, fruits etc.

Unnoticed causes

• Policy manipulation: Far from the reality, previous analysis about inflation has embraced external factors (exogenous factors, e.g. weather, international price and exchange rate) than realizing the internal ones (endogenous factors, e.g. discount rate and interest rate). “The NRB is an inflation inducer because it plays five roles: monopoly issuer of currency, banker’s note, regulator of commercial banks, and lender of last resort and conductor of Monetary Policy. Where, the Monetary Policy is a process which allows the NRB (as ordered by the government) to control the supply availability and cost (interest rate) of the money. It is self evident that hence the cause of inflation is the policy manipulation by NRB bureaucrats.

Within the field of Monetary Policy, the potential subversion of the underlying objective of price stability is understood by the jargon ‘time inconsistency’. There is a broad consensus that stable money is too important to be left to the day-to-day political process.

• Alternative to central banks: Once again, what we need are sound free banking foundations. We do not have such foundations and are unlikely ever to get them if things continue as they are. Central banking is a non-market, centralized approach to monetary matters. A central bank is granted certain legal powers and privileges that are the means by which it attempts to manipulate selected macro-economic measures. It is an absence of any central monetary authority and the issuance of notes as well as deposit accounts by individual private banks. More generally, under a free-banking structure, "banks are free to pursue whatever policies they find advantageous in issuing liabilities and holding asset portfolios, subject only to the general legal prohibition against fraud or breach of contract".

Private Banks issue better currency, but central banks issue currency today not because they have outcompeted the private banks at attracting loyal customers but because their sponsoring government outlawed private competition. This is especially obvious in countries where the public has every reason not to believe the central bank’s promise to redeem its currency. A central bank is a breach of freedom and private property, which needs to be abolished.

Impact of inflation (implications) to business managers

Business environment is a dynamic phenomenon. It never remains constant. One of the factors which make it such dynamic is Inflation. Inflation abruptly affects the business. It may be vice for many people but it can be turned out to be virtue for business managers if they have got the capability to cope it effectively. Only a manager with farsightedness can turn this negative situation in their favor. A business manager must have this capability in order to survive in the global market. Sometimes, according to the rate of inflation, managers have to make very complex decisions. Hence, market inflation rate makes the task of every manager somehow critical and complex.

Following are some of the implications of Inflation to business managers or business environment.

• Fall in purchasing power of money: High inflation redistributes the income of people. The fixed income earners and those lacking bargaining power will become relatively worse off as their purchasing power falls.
• Demand for higher rate of wages: Trade unions may demand for higher wages at times of high inflation. If the claims are accepted by the employers, it may give rise to a wage-price spiral which may aggravate the inflation problem.
• Undermine business confidence: During a high inflation period, wide fluctuations in the inflation rate make it difficult for business organizations to predict the future and accurately calculate prices and returns from investments. Therefore, it can undermine business confidence.
• Decrease in export leads to trade deficit: When inflation in a country is more than that in a competitive country, the exports from former country will be less attractive compared to the other country. This means there will be fewer sales for that country’s goods both at home and abroad and that will create a larger trade deficit. At the same time, high inflation in a country weakens its competitive position in the international market.
• Product quality issues: The managers have to meet the rapid demand of the market so to fulfill that they make rapid supply which affects the product quality.
• Change in production volume pattern: The production volume pattern will change as demand will be high. A good strategy is needed to meet the needs of public.
• Higher rediscount rate of central bank: The rate at which NRB buys or rediscounts the eligible bill of exchange and the other approved commercial papers represented by the commercial banks will be high.
• Distort in consumer behavior: High inflation distorts consumer behavior. Because of the fear of price increases, people tend to purchase their requirements in advance as much as possible. This can destabilize markets creating unnecessary shortages.