Inflation falls to 9-month low due to base effectConsumers only know that groceries have become costlier, and they couldn't care less about complex statistics, observers say.
Nepal’s inflation is at a nine-month low, but consumers don't feel that things are getting better because of the base effect, experts say.
When the inflation rate at the point chosen for comparison, or the base period, is high, the current inflation rate will show lower despite a rise in the price index, they say.
According to Nepal Rastra Bank, the year-on-year consumer price inflation in mid-December 2022 was 7.38 percent compared to 7.11 percent a year ago.
Monthly inflation started falling from October, when it was 8.50 percent, and fell to 8.08 percent in November.
“The drop in inflation, technically, can be attributed to the base effect,” said Gunakar Bhatta, spokesperson for the central bank.
“If there is a rise in the price index in the corresponding period of last year and recorded high inflation, then an absolute increase in the price index will show a lower inflation rate in the present year.”
For example, inflation was 3.49 percent in September 2021-22, the base period. In September 2022-23, inflation had reached 8.64 percent. In December 2021-22, inflation was recorded at 7.11 percent.
So given a high rate of inflation or high base effect, in December 2022-23, the absolute increase in the price index showed a lower inflation rate.
“But actually, inflation is high,” said Bhatta.
Consumers only know that groceries have become costlier, and they couldn't care less about complex statistics, observers say. Sita Tamang, a housewife from Bhaktapur, just stares angrily without saying anything when told that inflation is cooling down.
Dhirendra Shrestha, who owns a momo shop in Patan, laughs at the news that inflation has been dropping. “A 50-kg bag of flour used to cost Rs2,000 a year ago, now it costs Rs4,400,” said Shrestha. “Prices are not increasing, they are multiplying.”
Consumers say that cumin seeds which used to cost Rs400 per kg a year ago now cost Rs700 per kg. Except for the prices of vegetables, everything is expensive. “It’s difficult to do business,” said Shrestha.
The central bank said food and beverage inflation stood at 5.85 percent while non-food and service inflation rose to 8.59 percent in the review month.
Under the food and beverage category, the consumer price index of the restaurant and hotel sub-category increased by 15.56 percent, tobacco products by 11.81 percent, cereal grains and their products by 9.39 percent, milk products and eggs by 9.07 percent, and alcoholic drinks by 8.84 percent.
Under the non-food and services category, the year-on-year consumer price index of the transportation sub-category increased by 17.33 percent, health by 11.22 percent, recreation and culture by 8.76 percent, housing and utilities by 8.29 percent and furnishing and household equipment 8.29 percent.
“The base effect is one thing. But if we see the global context, inflation is dropping due to a fall in fuel prices,” said Bhatta. In Nepal, an equally influential factor is transportation costs.
“When transportation costs go up, everything goes up,” said Bhatta. Inflation in transportation increased by 17.33 percent in December, the highest in all categories.
Other factors affecting inflation are global price rises, devaluation of the Nepali rupee and artificial price hikes by traders.
On Thursday, the Nepal Bankers Association decided to cut interest rates which could fuel inflation.
Nepali banks will be paying 1 percentage point less interest on fixed deposits from January 15. When interest rates decline, consumers spend more as the cost of goods and services goes down because financing is cheaper.
Increased consumer spending means an increase in demand, and an increase in demand pushes up prices.
“Obviously, when the interest rate drops, demand will increase; and an increase in demand means increased prices,” said Bhatta.
Global growth is slowing sharply in the face of elevated inflation, higher interest rates, reduced investment, and disruptions caused by Russia’s invasion of Ukraine, according to the World Bank’s latest Global Economic Prospects report.
Given fragile economic conditions, any new adverse development—such as higher-than-expected inflation, abrupt rises in interest rates to contain it, a resurgence of the Covid-19 pandemic, or escalating geopolitical tensions—could push the global economy into recession.
“Although global inflation is expected to moderate, it will remain above pre-pandemic levels,” the report said.
Economist Govinda Nepal said that due to the political instability and elections in Nepal, prices in the domestic market went out of control especially after Russia’s invasion of Ukraine.
“There was no control in the market. Traders set the prices, and consumers paid them. There was no monitoring at all,” he said.
The good news is that remittance inflows increased by 23 percent to Rs480.50 billion in the first five months of the current fiscal year against a decrease of 6.3 percent in the same period of the previous year.
According to an estimate, the movement of Nepali migrant workers abroad could hit a new record, reaching nearly 1 million by this fiscal year.
But economists point out that remittance, which is mostly spent on consumption, is also fuelling inflation as everything needs to be imported nowadays.
“We have a small production base. Our manufacturing sector is not performing well. This is the basic indicator that our dependency on imports is growing at an alarming level,” said Nepal.
“We have to import, and inflation comes along with the imports,” he said. "There is no sign that inflation will be corrected any time soon."