Consumer prices rose at the slowest pace in 12 years in December, as food inflation eased and difference between consumer price hike in Nepal and India narrowed down to the lowest level in the last 28 months. 

Average prices of food and non-food items went up by 3.8 percent in December, as food inflation moderated to 0.6 percent and inflation wedge between Nepal and India fell to 0.4 percent, shows the latest macroeconomic report of the Nepal Rastra Bank (NRB), the central bank. 

The last time prices had cooled to this level was in December 2004, when inflation stood at 3.1 percent. 

Significant deceleration in inflation in recent months, however, should not be taken as fall in overall consumer demand, which could pose a threat to Nepal’s aim of achieving economic growth of 6.5 percent in this fiscal year, said Nara Bahadur Thapa, head of the Research Department at the NRB.

“Inflation has moderated because of correction in prices,” Thapa said, referring to rapid price hike recorded earlier this year when India imposed a trade embargo on Nepal.

Consumer prices soared by as much as 12.1 percent in January 2016 after India imposed trade blockade, disrupting supplies of almost everything from petroleum products and raw materials to daily essentials. Inflation has, however, been easing since the blockade was lifted in February.

“The base effect, improved supply situation and deceleration in Indian inflation are the underlying factors for a downward path of inflation in recent months,” says the NRB report.

One of the primary reasons for moderation in inflation in Nepal is slow hike in consumer prices in India. Indian inflation stood at two-year low of 3.4 percent in December.

In a net-importing country like Nepal, which relies on India for over 60 percent of its imports, fluctuation in consumer prices in southern neighbour directly affects prices here.

India’s retail inflation moderated after Prime Minister Narendra Modi’s shock currency replacement programme dented consumer spending, Reuters said. 

The decision taken by the Indian government on November 8 to pull IRs500 and IRs1,000 out of circulation has significantly reduced consumer demand, as people either don’t have much cash to make purchases or are holding back on spending.

As a result, food inflation in India moderated to 1.37 percent in December.

With the moderation in food prices in India, prices of cereal grains, pulses, legumes, ghee, oil and fruits fell in Nepal.

Food, including beverage, accounts for 43.9 percent of the consumer basket in Nepal. 

Average prices of ghee and cooking oil, for instance, slumped by 20.5 percent in December, while prices of pulses and legumes dropped by 6.6 percent. Even prices of cereal grains, which account for 11.33 percent of the consumer basket, fell by 1.1 percent, shows the NRB report. Among others, transportation cost dropped by 5.7 percent and communications cost fell by 0.6 percent.

Inflation

Overall                           3.8pc

Food                              0.6pc

Non-food and services     6.5pc

Kathmandu Valley           2.5pc

Tarai                              3.7pc

Hill                                 5.6pc

Mountain                        3.7pc