What is inflation? 6 main reasons of Inflation in Nepal.

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Inflation is the periodic decline in the purchasing power of any currency. Inflation is also called inflation. That is the rising cost of purchasing goods and services. For example, the same amount of goods and services cannot be purchased now for 100 rupees as 10 years ago.

Also, you may have to pay Rs 500 in the future to buy as much as you can buy at Rs 100 now. Even if the currency remains at Rs 100, its purchasing power will decline. Over time, it costs more money to buy less goods and services. That means the price goes up.

Current Consumer Price Rate in Nepal

In Nepal, inflation is measured based on the Consumer Price Index. Nepal Rastra Bank (NRB) has been disclosing the current economic and financial situation of the country every month. On this basis, the annual point-wise consumer price inflation rate of Nepal till mid-January is 5.97%. Consumer price inflation stood at 2.70% in the corresponding period of the previous year. On this basis, the inflation rate has doubled in one year.

Causes of inflation

Generally, increase in money supply is considered to be the main cause of inflation. However, the reasons for inflation may vary depending on the state of the economy.

1) Demand-driven inflation

Demand-driven inflation occurs when demand for certain goods and services exceeds the economy’s capacity. That is, when the demand for goods and services exceeds its supply, the price is pushed upwards and causes inflation. Higher demand but less flexible supply will lead to price increase as there will be differences in the balance of demand and supply.

2) Cost Inflation

Inflation is also seen as the cost of goods and services involved in the manufacturing process increases. In other words, when the cost of production increases, the cost increases, which leads to inflation. However, these costs are ultimately borne by the consumer. As production costs rise, so do the prices of consumer goods and services.

Generally, increase in capital investment, raw materials, interest rates and wage rates create cost overruns. For example, if the price of bricks, sand, cement and other items required for house construction increases, the price of ready house also increases.

3) Increase in money supply

Inflation also occurs when the supply of all currencies, including cash, coins, and bank balances, in circulation, increases at a faster rate than the rate of production of goods and services. This is more likely to lead to demand-driven inflation. Because, when people have enough money, their ability to spend also increases. Which increases the demand.

4) Devaluation

The act of adjusting the exchange rate of a national currency to a lower point is called devaluation. As a result, the value of the nation’s currency decreases. Currency devaluation makes exports cheaper. Foreigners are more likely to buy cheap goods. On the other hand, it is expensive for a currency devaluing nation to export goods from abroad.Due to which the citizens of that country are more likely to value domestic goods than foreign ones. China has been repeatedly accused of devaluing its currency.

5) Increasing wages and remuneration

The increase in wages or remuneration paid to the workers is also increasing the price. As wages are involved in the production process, the cost of production also increases when wages increase. If wage rates rise sharply, companies will either have to pass on the cost to consumers, or produce at a lower profit margin.

In such a scenario, high productivity can be expected to offset the costs involved in raising wages. However, as there are various other reasons for the price increase, the companies are also increasing the wages of the workers according to the price increase.

6) Government policy rules

Some government policy rules are also a factor of inflation. For example, if the government gives a tax exemption on a certain item, the demand for that item is likely to increase. If demand exceeds supply, costs will rise and prices may rise. Government policy rules are particularly likely to drive demand and increase inflation.

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