Inflation expectations among Nepali consumers hit new highsA majority of people expect average prices of goods and services to rise by a staggering 11.3 percent over the next year, according to the Inflation Expectation Survey released on Sunday.
Nepali consumers increased their short-term and medium-term inflation expectations again in the first quarter of 2021-22 amid elevated price pressures, according to a survey released by Nepal’s central bank on Sunday.
A majority of people expect average prices of goods and services to rise by a staggering 11.3 percent over the next year, the Inflation Expectation Survey shows.
The Inflation Expectation Survey is a study where consumers tend to expect future inflation that is higher than official estimates of current inflation. The survey was conducted from October 3 to October 8 among individual respondents from 10 market areas of seven cities through field interviews. The results are based on responses from 510 urban individuals.
Expectations also play a key role in determining inflation, according to the International Monetary Fund. If people or firms anticipate higher prices, they build these expectations into wage negotiations and contractual price adjustments (such as automatic rent increases).
In the short term, 87.1 percent of respondents expected the price level to increase in the next three months.
In the medium-term, 96.3 percent of respondents expected the price level to increase over the next year.
Only 1.4 percent of respondents expect that the general price level will decrease.
While 12.5 percent of respondents expect food prices to increase more than the current rate, 3.3 percent of respondents expect non-food prices to increase more than the current rate.
About 79.1 percent of respondents expect housing and real estate prices to increase.
According to Nepal Rastra Bank, mean and median inflation perception for the current period remained at 9.4 percent and 8 percent respectively.
The mean and median inflation expectations for three months ahead remained at 9.6 percent and 8 percent respectively.
The mean and median inflation expectations for one year ahead remained at 10.3 percent and 9 percent respectively.
Mean inflation expectation for the next three months varies from 12.5 percent for respondents from Birgunj to 5.9 percent for respondents from Nepalgunj.
Likewise, mean inflation expectation for the next one year varies from 13.4 percent for respondents from Birgunj to 5.9 percent for respondents from Nepalgunj, according to the report.
The median is the inflation rate of an item at the middle of the price changes in the consumer price index basket.
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 started an inflation expectations survey in January.
Factors like economic growth, inflation in India, exchange rates, oil prices and credit flows affect inflation in Nepal, as per the report.
The inflation rate in Nepal has been increasing due to the increase in fuel prices. External factors have also influenced prices in Nepal, according to economists.
Petrol is inching towards the 2014 record high price of Rs140 per litre. The oil supplier Nepal Oil Corporation has revised fuel prices 14 times since January. To date, the price of petrol has reached Rs136 per litre and diesel and kerosene now cost Rs119 per litre. The price of cooking gas has shot up to Rs1,575 per cylinder.
The freight cost and passenger fare in public transport have also increased by 28 percent.
The hike in bus fares and cargo charges has become burdens on people. Shipping costs are a key component of food prices in countries like Nepal.
The United Nations Conference on Trade and Development has warned that global consumer prices will rise significantly in the year ahead until shipping supply chain disruptions are unblocked and port constraints and terminal inefficiencies are tackled.
The analysis shows that the current surge in container freight rates, if sustained, could increase global import price levels by 11 percent and consumer price levels by 1.5 percent between now and 2023.
As per the central bank, the year-on-year consumer price inflation stood at 4.24 percent in the first three months of fiscal year 2021-22 compared to 3.79 percent a year ago. Food and beverage inflation stood at 3.63 percent whereas non-food and service inflation stood at 4.72 percent in the review month.
The price of ghee and oil rose by 31.68 percent, meat and fish by 11.93 percent, pulses and legumes by 10.71 percent, tobacco products and non-alcoholic drinks subcategories rose by 10.12 percent and 9.63 respectively, on a year-on-year basis.
Economist Keshav Acharya said that inflation is picking up at a staggering level. “In the past two-three years, our inflation was lower than India's but now it has started narrowing. Though our inflation is still lower than India's, the margin has declined,” he said.
Depleting foreign exchange reserves are putting pressure on the country’s balance of payment, current account and trade balance, which is not a good sign, he said.
Factors such as an increase in imports, negative growth of remittance and government not making capital budget expenditure are creating pressure on banks liquidity.
“We are already in a high-cost economy and if liquidity constraints are not addressed soon then it will increase the cost additionally,” he said.
With the rise in interest rates, the cost of production will increase which will erode the competitiveness of domestic products in the export market, said Acharya. "Liquidity constraints will bring distortion."