The difference between inflation rates in Nepal and India narrowed down to a 10-month low of 3.5 percent in August, indicating that effects of the unrest in the Tarai and trade blockade imposed by the southern neighbour that drove up consumer prices have waned.

Inflation stood at 10-month low of 8.6 percent in Nepal in August, shows the latest macroeconomic report of Nepal Rastra Bank (NRB). In the same month, the rate was at 5.1 percent in India. This shows Nepal-India inflation wedge stood at 3.5 percent for the month.

The last time the difference between consumer price hike of the two countries had narrowed down to this level was in October 2015, when the inflation wedge stood at 3.3 percent.

Inflation wedge is an indicator that reflects the disparity in hike in prices of goods and services in Nepal and India. This indicator is important because the southern neighbour contributes over 60 percent to the country’s imports—meaning a rise in prices of goods in India will automatically push up prices of major commodities in Nepal.

Although Nepal’s overdependence in trade with India is the result of Nepal’s landlocked nature, widening difference between price hikes in Nepal and India indicates problems faced by the country’s supply system.

One reason that drives up consumer prices in Nepal is supply-side constraint. This includes transport bottlenecks, shortage of raw materials, which leads to higher imports of finished goods, labour unrest, and inadequate supply of electricity and key inputs to increase production.

The protests in the Tarai and four-and-a-half-month blockade that affected movement of cargo vehicles and completely halted imports of essential goods, including food and petroleum products, had completely crippled the country’s supply system. Also, black marketing thrived at that time, which jacked up prices of most of the essentials and built inflationary pressure.

As a result, the difference between inflation in Nepal and India continued to widen and jumped to 6.4 percent in January. In that month, consumer prices in Nepal had gone up by 12.1 percent, as against 5.7 percent in India.

At that time, NRB had said the widening inflation wedge was on account of lingering impact of earthquakes of April and May, unrest in southern plains and disturbances on trade routes in southern parts of the country.

Contraction in inflation wedge in August, however, indicates that problems encountered by the supply system—due to protests in the Tarai and Indian trade embargo—are disappearing, according to NRB officials. Yet the inflation wedge of August is higher than 3.2 percent recorded in the same month a year ago.