Inflation moderated to over eight-year low of 6.7 percent in October, as food prices grew at a modest pace and difference between consumer price hike in Nepal and India narrowed down to the lowest level in the last 16 months.

Inflation had last stood at this level in February 2008. Since then consumer prices have soared by as much as 14.5 percent in November 2008 and 12.1 percent in January 2016 after India imposed trade blockade on Nepal, disrupting supplies of almost everything from petroleum products and raw materials to daily essentials.

“The inflationary pressure eased [in October] on account of modest hike in prices of food and beverage,” says the latest macroeconomic report of the Nepal Rastra Bank, the central bank.

Prices of food and beverage grew at relatively slower pace of 5.7 percent in October as against 9.7 percent recorded in the same month a year ago. Food and beverage account for 43.9 percent of the consumer basket.

In October, average prices of ghee and oil fell by 3.8 percent. On the contrary, average price of sugar and sugar-made products surged by 17.8 percent. The drastic jump in price of sugar and sugar-made products, however, was offset by moderate price hike recorded by meat, fish, milk products and eggs.

Average prices of meat and fish rose by 3.5 percent in October, while milk products and eggs became dearer by 3.6 percent. Although these price hikes reflect moderation in food inflation in October, prices of non-food items-which account for 56.1 percent of the consumer basket-jumped 7.6 percent in the same month, as prices of clothes and footwear surged by 11.2 percent, and house rent and utility bills soared by 9.4 percent. In the same month a year ago, non-food inflation stood at 7.1 percent.

One of the reasons that drives up consumer prices in Nepal is price hike in India, as the country imports almost 65 percent of goods from the southern neighbour. Lately, inflation has moderated in India too, as a result of which prices are going up at a relatively slower pace in the country.

However, changes in prices in India may not always transfer to Nepal. In January, for instance, consumer prices had gone up by 5.7 percent in India, whereas inflation stood at 12.1 percent in Nepal, reflecting inflation wedge of 6.4 percent.

At that time, NRB had said that the widening inflation wedge was on account of lingering impact of earthquakes of April and May, 2015, unrest in southern plains and disturbances on trade routes in southern parts of the country.

In other words, the big difference in inflation of Nepal and India of that time was supply-side constraint. 

At that time protests in the Tarai and blockade had affected movement of cargo vehicles and completely halted imports of goods, crippling the country’s supply system. Also, black marketing thrived at that time, which jacked up prices of most of the essentials and built inflationary pressure.

That inflation wedge narrowed down to 2.5 percent in October, the lowest since July 2015, indicating effects of unrest in the Tarai and trade blockade imposed by the southern neighbour that drove up consumer prices have waned.