Introduction:
Inflation has been quite a matter to be addressed in the present economic scenario. Inflation is simply the increase in prices of goods and services in economy or decrease in the value of money. It is said that when the quantity of money used as the medium of exchange in the economy is more than quantity of goods and services, inflation is most probable. This can be caused due to some direct causes such as increase of income or some indirect cause such as political forces in an economy.
Inflation has been a global issue and so is the case of Nepal. In the present scenario, the y-o-y consumer price inflation rate for the year 2009 has been 9.7% as calculated by Nepal Ratra Bank (NRB) in mid September 2009. While the consumer price inflation rate same period, last year was 13.5%. Similarly the inflation rate of food and beverage group is 16.3% while that of non-food and services group is 2.1%. Of the food and beverage items, the inflation rate of vegetables and fruits has been 43.5%. Similarly that of sugar and sugar related products increased by 40.5%. Similarly price indices of meat, fish and eggs as well as pulses sub-groups increased in the review period by 29.0% and 25.6% respectively. The index of the grains and cereal products subgroup also witnessed an increment of 5.8%.Within the group of non-food and services, the index of tobacco and related products rose up by 17.0% in the review period. In the review period, the y-o-y core inflation rose to 10.9%.
Cause:
Inflation is caused by an excessive increase in effective demand and production cost in the economy. Normally, it is caused due to the disequilibrium caused in aggregate demand and aggregate supply. Nepal is currently under transition phase and thus several factors contribute for the increasing price rate. Increase in income of consumers, credit policy, natural causes, lack of raw materials, techniques of productions, industrial disputes and political factors are some of the causes of inflation in Nepal.
The political instability has caused several social problems such as strikes, social insecurity, etc. As such the investors have been highly discouraged. Similarly the increases in social problems like these tend to decrease the productivity as the production is stopped. Similarly the disputes between industries and some of the so called revolutionary trade unions or political bodies can force industries to increase the amount of money to be segregated for wages and public welfare that would increase the production cost or unproductive expenditure and thus increasing the price of goods. Similarly several natural causes such as floods and drought have been affecting the production of Nepal adversely. Change in the global climate has brought larger scale catastrophes those have swept away the production recently. This decrease in productivity must be another vital reason behind inflation. Nepal has been implementing the conventional techniques of production methods while the demand has been quite higher than the production so that the investment done does not yield larger profit so that the price is increasing. Another factor causing inflation is the credit policy. The demand for credit has been in quite an amount and thus commercial banks have only a smaller amount of money in their cash-fund so that large amount of money is circulated in society. So the increase in use of money in society creates inflation. Similarly the budget policy of government is another cause for inflation. The expected amount of expenditure has been more than expected income thus bank takes loan from NRB and the excess amount of money when is invested in various sectors increases the monetary expansion. This also increases the flow of money in nation thus increasing demand and thus causing inflation. Similarly the increase in the income of government employees has increased the demand of consumption goods and investments thus causing inflation. Another reason behind inflation in Nepal is lack of raw materials. This decreases production or increases production cost both of which cause inflation. Sometimes to create artificial scarcity, black marketers increase the stock illegally and thus increase the price to earn more profit commonly called hoarding.
Effect:
Inflation is usually supposed to have negative effect in an economy but sometimes the inflation of smaller rates can provide some motion to the economy. This sort of motion increases the employment and leads economy towards development. But when the inflation rate is high this will affect the economy negatively such as it creates hindrances in capital formation and creation of black market (artificial scarcity). So inflation is not necessarily bad.
Some contemporary effects of inflation in our case are the increase in the gap between haves and have-nots, discouragement of foreign capital, decrease in quality of goods, etc. Due to inflation some class of society will face benefit while some class will face loss. The increase in inflation rate benefits industrialists and businessmen and makes them richer than the class having fixed income. Inflation changes the distribution of wealth in economy. Debtor will be benefited while the creditors will suffer a loss, business community will earn more, and fixed salary earner will be at a loss due to inflation.
Similarly inflation has some effects on production as well. Inflation devaluates the value of money and thus the capital accumulation is hampered. It discourages foreign investments and less capital is funded thus production decreases. Due to change in normal economic circumstance businessmen instead of earning normal profit through ordinary course of business, shift to easy and fast profit making activities often called speculating activities. Such activities are suspected to reduce the quality of goods. Increase in price influences some people to increase the stock and create artificial scarcity that increases their profit and price even more. Heavy inflation also have political effect as the people start to get dissatisfied with government and thus opposition parties get a way to criticize the government and remove the ruling party.
Conclusion:
Viewing overall inflation rate this year has increased by a value 9.7% (lesser than that of last year). while the price of food and beverage is raising sharp by about 43.5% and that of sugar and sugar related goods at about 40.5% which is quite a value as compared to last years inflation rate. Some of the main causes of the inflation are political instability, natural calamities, budget policy, industrial disputes, etc. This inflation has had negative effect upon the lifestyle of daily wagers and those having fixed income while has benefited the businessmen and industrialists thus increasing the financial gap between them
