Nepal Rastra Bank reports 8.32% average inflation rate over 50 years

KATHMANDU: Nepal Rastra Bank’s study reveals that the average inflation rate in Nepal over the past five decades has been 8.32 percent. Despite significant fluctuations in inflation during this period, the average rate has remained in the single digits (around 8 percent), according to the central bank. This is the first time Nepal Rastra Bank has conducted such a study.

Over the past five decades, the prices of items in the food and beverage group, including vegetables, pulses, grains, sugar, and alcohol, have seen relatively higher increases. However, the prices of items and services in the non-food and service group, such as education, clothing, and footwear, and communications, have remained comparatively lower, contributing to an overall single-digit inflation rate, the bank reported.

Prakash Kumar Shrestha, Head of the Research Department at Nepal Rastra Bank, stated that the average inflation rate in Nepal has been moderate over this period. “Recently, the average inflation rate has been lower,” he said, adding, “Monetary policy started being introduced after the enactment of the Nepal Rastra Bank Act in 2002, which set targets and limits for inflation.” He noted that in the past decade, there have been significant improvements in calculating inflation, setting targets, and other related aspects.

The study analyzed inflation by dividing the past 50 years into three phases. The first phase, from the fiscal year 1973/74 to 1989/90, marks the beginning of economic liberalization. The second phase, from 1990/91 to 2005/06, follows the announcement of the new constitution, and the third phase, from 2006/07 to 2022/23, follows the democratic movement.

In the first 16 years covered by the study, the average inflation rate was 9.88 percent, with the food and beverage group experiencing an average increase of 10.09 percent and the non-food and service group seeing a 9.69 percent rise.

During this period, the inflation rate was in double digits at the beginning due to increased petroleum prices and money supply through credit expansion. However, factors such as favorable weather for harvesting, lower inflation in India, and tight credit policies helped reduce overall inflation.

In the second phase, the average inflation rate was 7.64 percent, with the food and beverage group averaging 7.46 percent and the non-food and service group 7.76 percent. This shows a decrease in the average inflation rate compared to the first phase. However, the average inflation rate in 1991/92 was 21.05 percent.

At that time, the government adopted a convertible currency policy, leading to a devaluation of the Nepalese rupee against the US dollar and other convertible foreign currencies, which spiked the inflation rate. The government also began setting maximum prices for various goods and services such as milk, petroleum products, education fees, telephone charges, and electricity, which helped reduce the inflation rate.

Post-1991/92, inflation control has been more effective. In the subsequent five fiscal years, Nepal’s inflation rate averaged below 5 percent, with the average inflation rate in 2000/01 at 2.43 percent. Contributing factors included lower inflation in India and increased agricultural production in Nepal due to favorable weather.

From 2006/07 to 2022/23, the average inflation rate was 7.41 percent, with the food and beverage group averaging 8.60 percent and the non-food and service group 6.39 percent. This period saw significant events impacting inflation, such as the 12.63 percent average inflation rate in 2008/09 due to load shedding, political movements, labor strikes in industries, and business cartels.

However, in 2015/16, the average inflation rate dropped to a single digit at 9.93 percent. During this time, natural disasters such as devastating earthquakes, floods, and landslides caused a double-digit inflation rate in both the food and non-food subgroups for several years. Nonetheless, the inflation rate has shown a decreasing trend over the past five decades.

The study shows that the average inflation rate in 2022/23 was 7.74 percent. The food and beverage group contributed the most to the average inflation during this period, at 36.3 percent. Household items contributed 24.2 percent, transportation 8.7 percent, education 9 percent, and other items about 22 percent. Overall, the food and beverage group has consistently had the highest contribution to total inflation.

According to the central bank’s monthly report, the year-on-year consumer price inflation rate was 4.17 percent in mid-May 2024. In the same period the previous year, the rate was 6.83 percent. During this period, the food and beverage group’s inflation rate was 5.76 percent, while the non-food and service group’s inflation rate was 2.94 percent.

The annual point-to-point price index of the vegetable subgroup increased by 16.02 percent, pulses and grains by 11.76 percent, food and food-related products by 7.32 percent, sugar and sugar-related items by 6.98 percent, and non-alcoholic beverages by 5.95 percent. However, the annual point-to-point price index of the ghee and oil subgroup decreased by 5.51 percent.

In mid-May, the annual point-to-point price index of various items and services under the non-food and service group increased by 12.47 percent, education by 5.64 percent, and clothing and footwear by 3.46 percent. However, the annual point-to-point price index of the communication subgroup decreased by 0.48 percent, and transportation by 0.18 percent.

The annual point-to-point consumer price inflation rate in mid-May was 4.25 percent in the Kathmandu Valley, 3.82 percent in the Terai, 4.63 percent in the Hills, and 4.77 percent in the Mountains. In the same month last year, the inflation rate was 7.19 percent in the Kathmandu Valley, 6.93 percent in the Terai, 6.28 percent in the Hills, and 6.39 percent in the Mountains.

Similarly, the annual point-to-point wholesale inflation rate was 5.48 percent in mid-May 2024. In the same month last year, this rate was 3.10 percent. In mid-May, the annual point-to-point wholesale inflation rate of consumable goods was 6.87 percent, intermediate goods 5.32 percent, and capital goods 1.66 percent. During the review month, the annual point-to-point wholesale inflation rate of construction materials decreased by 2.12 percent.