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Comparative Analysis of Inflation in Nepal and India

Nepal Rastra Bank
Research Department
Baluwatar, Kathmandu

30 November 2011

Nepal Rastra Bank
Research Department
30 November 2011

Comparative Analysis of Inflation in Nepal and India
Background: Year-on-Year monthly variation of inflation, both in Nepal and India, seemed to be higher than expected at present situation. Inflation in Nepal is largely affected by rising food price in the country, which is a global phenomenon also in the present context. However, inflation in food component has come down to single digit after a long time in October 2011. Non food inflation would go higher in the future if the present exchange rate trend (especially USD exchange rate appreciation) still goes to upward direction. Overall consumer price inflation in Nepal has been influenced by rising prices of food and petroleum products and rising inflation India. Inflation data1 for the past few years (August 2007 to October 2011 of Nepal and August 2007 to July 2011 of India for the analysis of monthly annual variation) have been taken into consideration for a review. Observations and suggestions extended by a report (IMF Country Report No. 11/319, November 2011- Nepal: Selected Issues) of International Monetary Fund (IMF) have also been referred. Consumer Price Inflation in Nepal: Overall Inflation: Overall consumer price inflation was moderate between August 2007 and March 2008 having an approximate range of 5 percent to 6 percent changes.  Inflation started to escalate and reached to double digit (10.1 percent) in June 2008. Afterwards, overall inflation remained either in double digit (highest peak 13.8 on January 2009) or higher side single digit till to date within the review period. Food Price Inflation:  Very few months (August 2007 – March 2008 except in September) observed a single digit food price inflation ranging from 6.6 percent to 9.2 percent. Rest of the periods observed double digit inflation with a record of 21.5 percent hike in June 2009.  Thus, increased food price has been one of the decisive forces for maintaining higher level inflation in Nepal. Non-food Price Inflation:  On the contrary, Non-food inflation showed a comfortable situation during the review period registering single digit increment ranged from 2.6 percent to 9.0 percent except in August to December, 2008. In order to capture an ‘inflation trend’ in Nepal, time plots of overall consumer price inflation and its principal components have been presented in the following graph: 

1

Data Source: Nepal Rastra Bank and Office of the Economic Adviser, Ministry of Commerce and Industry, Government of India.

Chart - 1 Consumer Price Inflation (change in %)
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0 III IV I II III IV I II III IV I II III IV I II 2011 III IV 2007 2008 2009 2010

CPI_NEP_OVERALL CPI_NEP_FOOD CPI_NEP_NONFOOD

The time plots displayed in chart – 1 (CPI_NEP stands for Consumer Price Inflation in Nepal) also support aforementioned discussions as food price inflation was always at higher level to overall inflation during the entire period taken under review. On the contrary, non-food inflation always maintained lower side compared to overall CPI changes. Wholesale Price Inflation:  Overall wholesale price inflation showed a mixed trend within the review period. It was recorded as low as 4.3 percent (February 2008) to as high as 18.9 percent (December 2009) within the review period. Sub-components of WPI (agriculture commodities, domestic manufactured commodities and imported commodities) showed a parallel run in the beginning until 2nd quarter of 2008 and periods after 2nd quarter of 2010 only. Rest of the periods, they had a visible deviations with the overall WPI inflation.



In order to have a look at historical trend, time plots of the WPI and its principal components are exhibited in the following chart: Chart - 2 Wholesale Price Inflation (change in %) 40 30

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