Handicraft trader Prem Prasad Timalsina's income dropped to near zero after Covid-19 started last year. The tourists stopped coming, and his shop Durga Handicraft at Kathmandu's tourist hotspot of Thamel wears a cheerless look.

The 43-year-old Timalsina is not hopeful that business will recover any time soon. But what worries him most is inflation.

Since the start of the pandemic, consumers like Timalsina have cut back on transportation, hotel accommodation, dining out and recreation, and spent more on groceries and beverages.

According to Nepal Rastra Bank, year-on-year consumer price inflation stood at 4.19 percent in the 11th month of fiscal 2020-21, compared to 4.54 percent a year ago. Food and beverage inflation stood at 6.22 percent whereas non-food and service inflation stood at 2.63 percent in the review month.

But for Timalsina, the market price has not been reflected in the government’s inflation data. And for the first time, the Kadaghari resident has had to borrow from cooperatives and small groups to feed his family of five.

Timalsina has no other source of income except his handicraft shop which is currently partially open.

“Prices of everything—from vegetables to clothes, and from room rent to fuel—have increased since the pandemic hit the country,” said Timalsina. “Vegetables, edible oil, rice, lentils, sugar and other essentials have become so expensive.”

Balram Chand, a migrant worker who returned from Qatar after two years as soon as the lockdown was lifted in July last year, has been looking for a job.

Chand, who lives in a rented flat at Kalanki with a six-member family, said inflation was killing him. “It’s so expensive living in Kathmandu. My little savings from working in Qatar are almost finished now,” he said.

According to him, his monthly expenses including flat rent, food and children's school fees come to around Rs25,000. This was before the pandemic. “Now the expenses have jumped to more than Rs32,000 monthly." Chand is planning to go abroad again to earn money.

Consumers say inflation is very high, but it has not been reflected in the government’s data.

Consumers like Timalsina and Chand will also have to bear the brunt of the recently hiked transportation fare in the midst of the pandemic. Transport entrepreneurs have jacked up bus fares on inter-provincial routes by a sharp 28 percent. Cargo carriers serving routes in the Tarai and hills have hiked freight charges by 26 and 20 percent, respectively.

The hike in bus fares and cargo charges has become burdens on people who have suffered severe income losses due to the months-long lockdown and travel restrictions. Shipping costs are a key component of food prices in countries like Nepal.

Factors like economic growth, inflation in India, exchange rates, oil prices and credit flows affect inflation in Nepal, as per the report.

Consumers spent relatively more on housing and online education and communication like the internet in the wake of the pandemic.

As the market was under lockdown, food and beverages costs had a much smaller impact on the official inflation figure.

A majority of people expect the average prices of goods and services to grow by 10 percent in a year, according to an Inflation Expectation Survey Report released by Nepal’s central bank.

The Inflation Expectation Survey is a study where consumers tend to expect future inflation that is higher than official estimates of current inflation.

According to the survey, about 86.9 percent of respondents expect the general price level to increase in three months ahead. About 35.9 percent of respondents expect that the price increase will be higher than the current rate.

Only 2.9 percent of respondents expect that the general price level will decrease. While 20.2 percent of respondents expect food products price to increase more than the current rate, 33.8 percent of respondents expect non-food prices to increase more than the current rate.

About 76.1 percent of respondents expect housing and real estate prices to increase.

According to Nepal Rastra Bank, the mean inflation perception, average inflation for the current period, three months ahead and one year ahead, have been found to be 8.0 percent, 8.7 percent and 10.0 percent respectively.

The median inflation perception, inflation rate of the item at the middle of the price changes in the consumer price index, for the current period, three months ahead and one year ahead, have been found to be 5.5 percent, 7.0 percent and 8.0 percent respectively.

Inflation has a severe impact on both fixed income earners, who get salaries on a monthly basis, and daily wage earners as their income does not increase in proportion to inflation, said economist Keshab Acharya.

“As a result, people living in urban areas are unable to afford better health and education, including food. This highlights the risks of a broken social security system trapping millions in poverty.”

The real income of people declines in proportion to the increase in inflation, Acharya said.

Nearly 44 percent of the population that participates in the labour force in Nepal are in the informal sector.

Fixed income earners and wage earners will not be able to cope with increasing inflation as they do not have manoeuvrability, Acharya said.

“As incomes have been hit with job losses and decline in payment since the first wave of Covid-19 and the lockdown, inflation will have its worst impact on that population, pushing millions into the poverty trap,” Acharya said.

Traders who have links to power and information regarding inflation will pile up stocks and sell them at a super normal profit, he added.

According to Acharya, disruptions in the supply chain and increases in global production costs will also have an impact on inflation as the country imports most of its food and non-food requirements from other countries.

As global inflation is increasing and a third wave of the pandemic has started showing its effects, there are less chances inflation will fluctuate or decline, according to economists.

Inflation expectation is also one of the key indicators for future inflation, but it has not been observed so far in Nepal. Nepal Rastra Bank began surveying inflation expectations by conducting the first survey in January-February 2021.