3. Price and Supply
The Consumer Price Index (CPI) based annual inflation rate that had earlier shown rising trend since the FY 2005/06 and attained highest point of 12.6 percent in the FY 2008/09 has come down in the last two fiscal years. Although, inflation rate had stood below 5.0 percent for about half a decade prior to the FY 2005/06. Both the internal and external causes have influenced the rise in inflation rate in the past few years. Frequent closures, strikes, load-shedding and political instability that have adverse impact on productive activities and supply situation have been the dominant internal factors, while the price hike in petroleum products and impact of Indian inflation are the major external factors. Additional causes of the apparent impact of the Indian inflation on Nepalese economy can be attributed mainly to the open boarder between these two countries, Nepal's foreign exchange rate pegged with Indian currency, and almost about two-thirds of the trade with India. Though inflation seems contained in the last few months, it is still not that easy to lessen inflationary pressure until positive impact is visible on both the structural and external factors necessary for maintaining the inflation rate at the minimum.
Overall Consumer Price Situation
Consumer Price Index (CPI), taking FY 2005/06 as the base year, has been published since the last fiscal year on the basis of the fourth household budget survey conducted by Nepal Rastra Bank. According to this, CPI-based point-to-point annual urban aggregate consumer price index remained at 7.0 percent in mid-March 2011. The inflation rate for the same period in the previous year was 10.7 percent. Increase in the production of monsoon and dry season crops due to favourable climatic condition, and decline in price of food grains in India has caused the decline in food and beverages group thereby bringing improvement in the overall consumer inflation rate. However, it cannot be denied that price hike in the non-food items due to depreciation of Nepalese currency against the US dollar, price rise in petroleum products, increase in salary and wage rates, and weak distribution and monitoring mechanism will exert pressure on overall consumer price index. Table 3.(a) CPI-Based Annual Point to Point Inflation Rate Base Year 2006/07 = 100 Percentage change
Month 2006/07 Mid-July 4.5 2007/08 5.6
Fiscal year 2008/09 11.9 2009/10 10.1 2010/11 9.5 2011/12 7.7
Mid-Aug. Mid-Sept. Mid-Oct. Mid-Nov. Mid-Dec. Mid-Jan. Mid-Feb. Mid-Mar. Mid-Apr. Mid-May Mud-June Average Source: Nepal Rastra Bank
5.5 6.5 6.4 5.8 4.6 5.1 5.4 5.6 6.6 6.7 8.0 5.9
6.1 5.4 5.3 4.6 4.8 5.2 6.0 8.0 8.3 10.1 10.6 6.7
12.5 13.3 13.7 13.4 13.8 13.2 12.8 11.6 12.4 12.0 11.1 12.6
9.2 8.6 9.1 10.3 10.7 11.0 10.0 9.8 8.9 8.2 9.0 9.6
8.6 8.9 8.4 9.6 11.3 10.2 10.7 10.6 9.5 8.8 9.6 9.6
8.5 8.9 8.5 7.5 6.8 7.0 7.0
Average consumer price index stood at 7.7 percent during the first eight months of the current fiscal year. It was 9.7 percent in the corresponding period of the previous fiscal year. This decrease is close to 7.0 percent target set in the monetary policy of the Nepal Rastra Bank for the current fiscal year. The average inflation rate has declined due to decline in prices of cereals grains and their products, which carry the highest weight in the Food and Beverage index. Impact of the price hike in petroleum products in the past few months, deflation of Nepalese currency against the US Dollar, closures, and strikes and so on, however, are yet to be evaluated.
Chart 3 (a) : Change in Consumer Price Index 14.0 12.0 10.0 In Percent 8.0 6.0 4.0 2.0 0.0
By geographical regions, price index recorded highest in Hills with the increase of 8.6 percent, followed by 7.1 percent in Terai, and 5.6 percent in Kathmandu Valley. These rates were 11.6 percent, 7.9 percent and 13.5 percent...
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