In November, consumer inflation in the United States—the largest economy in the world—jumped 6.8 percent year-over-year; this was the steepest price rise since June 1982; back then, inflation peaked at 14.8 percent in March 1980. The current pace is nowhere near that, but the trend is up. In May last year, US consumer prices rose a subdued 0.1 percent. Inflation is perking up globally. This followed aggressive money-printing by major central banks post-pandemic, putting lots of extra cash in people’s pockets. Supply-chain bottlenecks are being blamed for the price rise. But a surge in end-demand—a by-product of ultra-easy monetary and fiscal policy—should equally share the blame.

Then there are countries like Nepal, which are experiencing inflation not because they aggressively adopted a stimulative policy, but because they are caught in the crosshairs of imported inflation. In the 12 months to mid-November, consumer inflation in Nepal rose 5.3 percent. Early last year, just before Covid-19 began ravaging the global economy, inflation neared 7 percent. Mid-November’s pace is much higher than the 2.7 percent recorded mid-February this year. As far as Nepal Rastra Bank, the nation’s central bank, is concerned, it would not want inflation to begin to get institutionalised. There are incipient signs this is beginning to put down roots.

Higher inflation

Last month, Nepal Rastra Bank released its Inflation Expectations Survey for the first quarter (mid-July through mid-October) of the fiscal year 2021-22. Respondents expected the average prices of goods and services to rise 10.3 percent over the next year. Expectations play a significant role in future inflation. If employees are convinced inflation is here to stay, they would demand a raise to offset the expected rise in prices. Employers will be forced to build it into wage negotiations. Businesses expect to earn a certain margin, so they raise the prices of goods and services they offer. It is a self-fulfilling prophecy, a vicious cycle. The sooner this gets nipped in the bud, the better.

The upward pressure on prices in Nepal began to unfold as the economy re-opened post Covid19 lockdown. Rather interestingly, and for the most part, this was not caused by supply shocks. In the developed countries such as the US, we have heard of congested ports, manufacturers not being able to fulfil demand because of chip shortages or insufficient truck drivers. Nothing of this sort was taking place in Nepal. Here, middlemen are notorious for raking in high spreads–producers getting paid less and retailers charged more. Covid-19 was used as an opportunity to squeeze consumers. More importantly, dependence on imports is too high. And this may have something to do with the recent jump in inflation.

During the first four months of the current fiscal year ended mid-November, Nepal’s merchandise imports surged 62 percent to Rs650 billion, versus a drop of 11 percent a year ago; imports from India and China jumped 46 percent and 57 percent respectively. Together, these two nations account for more than three-fourths of Nepal’s imports. Reliance on India is lop-sided, with the last fiscal 2020-21 accounting for 63 percent; China was a distant second at 15 percent. Understandably, when India, in particular, sneezes, Nepal catches a cold. In November, annual consumer inflation in India was 4.9 percent, up from 4.4 percent in September; earlier in January, it was 4.1 percent.

China’s is even more interesting because it is considered the world’s factory. China’s consumer prices rose 2.3 percent in November from a year earlier; as recently as in January and February, prices were falling at a 0.3 percent and 0.2 percent rate respectively. More importantly, in November, China’s producer price index rose 12.9 percent year-over-year, moderating slightly from October’s 13.5 percent pace. Globally, commodity prices are through the roof. In Nepal, the price of petrol has reached Rs136 per litre. China is also suffering from a power crunch. All this puts downstream businesses under pressure to pass on rising costs to consumers. If the price of apples rises in China, it will do so in Nepal as well.

For policymakers in Nepal, this poses a problem. Apart from coronavirus-spurred programmes such as a refinance facility designed to help businesses in dire need of credit, Nepal Rastra Bank never flooded the system with stimulus to begin with. Thus, there is not much it can do to turn off the hose. Whatever help it provided was primarily done to save businesses, not spur consumption. Apart from easy loans for businesses, there were handouts for households in the form of stimulus cheques in the developed nations such as the US, even as the unemployed got extended benefits. A combination of fiscal and monetary stimulus led to the boom these economies find themselves in.

Supply disruptions

In other words, the recovery was anything but organic. For instance, at the end of 2019, the 12-month total US budget deficit was $1 trillion, which by March this year had ballooned to $4.1 trillion before dropping to $2.7 trillion in November. Similarly, the Fed’s balance sheet more than doubled from $4.2 trillion at the end of 2019 to $8.7 trillion now, and the European Central Bank’s went from 4.7 trillion euros at the end of 2019 to 8.5 trillion euros now. All this sudden surge in money supply had to go somewhere. It heavily went into consumption. The global infrastructure was not ready for it. Covid-19 undoubtedly disrupted the global supply chain, but the real culprit lies in surging end-demand.

This should raise the odds that inflation will behave once central banks withdraw support. Some, including the Fed, have begun to do that. The lesson for central bankers in all this is that you reap what you sow and that the developing nations such as Nepal suffer for no fault of their own. Self-sufficiency is the antidote to this, which, given the development phase Nepal is in, is easier said than done. Most commodities are imported. But some like petrol can be replaced over time. Nepal imported Rs70 billion worth of petrol, diesel and liquefied petroleum gas in the first four months of the current fiscal. Adopting electric vehicles and greater electricity use can not only cut the bill, but also clip a potential source of imported inflation.