Inflation

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MBA-III, Uniglobe College, Kathmandu, Nepal

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Inflation

  1. 1. 1 CHAPTER I INTRODUCTION 1.1GENERAL BACKGROUND In economics, inflation is a rise in the general level of prices of goods and services in an economy over a period of time. When the general price level rises, each unit of currency buys fewer goods and services. Consequently, inflation also reflects erosion in the purchasing power of money – a loss of real value in the internal medium of exchange and unit of account in the economy. A chief measure of price inflation is the inflation rate, the annualized percentage change in a general price index (normally the Consumer Price Index) over time. Inflation's effects on an economy are various and can be simultaneously positive and negative. Negative effects of inflation include a decrease in the real value of money and other monetary items over time, uncertainty over future inflation which may discourage investment and savings, and if inflation is rapid enough, shortages of goods as consumers begin hoarding out of concern that prices will increase in the future. Positive effects include ensuring central banks can adjust nominal interest rates (intended to mitigate recessions) and encouraging investment in non-monetary capital projects. Different economists understand and define the concept of inflation in different ways. But in generally inflation refers to a situation of continuously rising prices of commodities and factors of production. On different grounds, economists have classified inflation into various types. According to the rate inflation there are four types of inflation. These are moderate Inflation, running Inflation, galloping Inflation and hyper Inflation. But there are two types of inflation on the basis of Cause of Origin: they are Demand Pull Inflation and Cost Push Inflation .similarly on the basis of government reaction or control inflation can be two types: they are open & suppressed inflation. Economists generally agree that high rates of inflation and hyperinflation are caused by an excessive growth of the money supply. Views on which factors determine low to moderate rates of inflation are more varied. Low or moderate inflation may be attributed to fluctuations in real demand for goods and services, or changes in available supplies such as during scarcities, as well as to growth in the money supply. However, the consensus view is
  2. 2. 2 that a long sustained period of inflation is caused by money supply growing faster than the rate of economic growth. Today, most economists favor a low, steady rate of inflation. Low (as opposed to zero or negative) inflation reduces the severity of economic recessions by enabling the labor market to adjust more quickly in a downturn, and reduces the risk that a liquidity trap prevents monetary policy from stabilizing the economy. The task of keeping the rate of inflation low and stable is usually given to monetary authorities. Generally, these monetary authorities are the central banks that control monetary policy through the setting of interest rates, through open market operations, and through the setting of banking reserve requirements. According to Wikipedia, “inflation is a rise in the general level of prices of goods and services in an economy over a period of time.” When the general price level rises, each unit of currency buys fewer goods and services. Consequently, inflation also reflects erosion in the purchasing power of money – a loss of real value in the internal medium of exchange and unit of account in the economy. So, Inflation is an increase in the price of a basket of goods and services that is representative of the economy as a whole. Hence, it is considered that Inflation is the result of excessive money supply in the market. 1.2 OBJECTIVES OF THE STUDY The major objectives of the study are as following: To analyze the impact of inflation in the economy. To analyze the impact of inflation in Nepalese economy. To analyze the trend in Nepalese inflation rate. To know the current scenario of inflation in Nepal To know the causes of inflation in the economy. 1.3 LIMITATION OF THE STUDY The major limitations of the study are as follows: This study is only focused on inflation. This report only includes the data of Nepalese inflation.
  3. 3. 3 Due to time limitation more data has not been incorporated. 1.4 SIGNIFICANCE OF THE STUDY Any report has its own importance to different stakeholders. Generally inflation is a process of increase in the general level of prices for goods and services or fall in the purchasing power of money. So, Inflation is an increase in the price of a basket of goods and services that is representative of the economy as a whole. Hence, it is considered that Inflation is the result of excessive money supply in the market. This report is important to those stakeholders who want to know about the inflation. This report is significant to researcher, students, government, various organizations etc. Thus it is important to all. 1.5 DEFINITION OF SOME TERMINOLOGY Consumer Price Index (CPI) A measure that examines the weighted average of prices of a basket of consumer goods and services, such as transportation, food and medical care. The CPI is calculated by taking price changes for each item in the predetermined basket of goods and averaging them; the goods are weighted according to their importance. Changes in CPI are used to assess price changes associated with the cost of living. Wholesale Price Index (WPI) A stock index in which each stock influences the index in proportion to its price per share. The value of the index is generated by adding the prices of each of the stocks in the index and dividing them by the total number of stocks. Stocks with a higher price will be given more weight and, therefore, will have a greater influence over the performance of the index. GDP Deflator In economics, the GDP deflator (implicit price deflator for GDP) is a measure of the level of prices of all new, domestically produced, final goods and services in an economy. GDP stands for gross domestic product, the total value of all final goods and services produced within that economy during a specified period.
  4. 4. 4 Purchasing Power The value of a currency expressed in terms of the amount of goods or services that one unit of money can buy. Purchasing power is important because, all else being equal, inflation decreases the amount of goods or services you'd be able to purchase. In investment terms, the dollar amount of credit available to a customer to buy additional securities against the existing marginable securities in the brokerage account. Deflation Deflation is a decrease in the general price level of goods and services. Deflation occurs when the inflation rate falls below 0% (a negative inflation rate). This should not be confused with disinflation, a slow-down in the inflation rate (i.e. when inflation declines to lower levels). Inflation reduces the real value of money over time; conversely, deflation increases the real value of money – the currency of a national or regional economy. This allows one to buy more goods with the same amount of money over time. Growth Rate The amount of increase that a specific variable has gained within a specific period and context. For investors, this typically represents the compounded annualized rate of growth of a company's revenues, earnings, dividends and even macro concepts - such as the economy as a whole. Balance of payment (BOP) The balance of payments is a statistical statement that summarizes transactions between residents and nonresidents during a period. It is the sum of the current and capital account balances. Creeping Inflation When prices are gently rising, it is referred as Creeping Inflation. It is the mildest form of inflation and also known as a Mild Inflation or Low Inflation. According to R.P.
  5. 5. 5 Kent, when prices rise by not more than (up to) 3% per annum (year), it is called Creeping Inflation. Chronic Inflation If creeping inflation persist (continues to increase) for a longer period of time then it is often called as Chronic or Secular Inflation. Chronic Creeping Inflation can be either Continuous (which remains consistent without any downward movement) or Intermittent (which occurs at regular intervals). It is called chronic because if an inflation rate continues to grow for a longer period without any downturn, then it possibly leads to Hyperinflation. Walking Inflation When the rate of rising prices is more than the Creeping Inflation, it is known as Walking Inflation. When prices rise by more than 3% but less than 10% per annum (i.e between 3% and 10% per annum), it is called as Walking Inflation. According to some economists, walking inflation must be taken seriously as it gives a cautionary signal for the occurrence of Running inflation. Furthermore, if walking inflation is not checked in due time it can eventually result in Galloping inflation. Moderate Inflation Prof. Samuelson clubbed together concept of Crepping and Walking inflation into Moderate Inflation. When prices rise by less than 10% per annum (single digit inflation rate), it is known as Moderate Inflation. According to Prof. Samuelson, it is a stable inflation and not a serious economic problem. Running Inflation A rapid acceleration in the rate of rising prices is referred as Running Inflation. When prices rise by more than 10% per annum, running inflation occurs. Though economists have not suggested a fixed range for measuring running inflation, we may consider price rise between 10% to 20% per annum (double digit inflation rate) as a running inflation.
  6. 6. 6 Galloping Inflation According to Prof. Samuelson, if prices rise by double or triple digit inflation rates like 30% or 400% or 999% per annum, then the situation can be termed as Galloping Inflation. When prices rise by more than 20% but less than 1000% per annum (i.e. between 20% to 1000% per annum), galloping inflation occurs. It is also referred as Jumping inflation. India has been witnessing galloping inflation since the second five year plan period. Hyperinflation Hyperinflation refers to a situation where the prices rise at an alarming high rate. The prices rise so fast that it becomes very difficult to measure its magnitude. However, in quantitative terms, when prices rise above 1000% per annum (quadruple or four digit inflation rate), it is termed as Hyperinflation. During a worst case scenario of hyperinflation, value of national currency (money) of an affected country reduces almost to zero. Paper money becomes worthless and people start trading either in gold and silver or sometimes even use the old barter system of commerce. Two worst examples of hyperinflation recorded in world history are of those experienced by Hungary in year 1946 and Zimbabwe during 2004-2009 under Robert Mugabe' sregime.
  7. 7. 7 CHAPTER II REVIEW OF LITERATURE 2.1 REVIEW OF LITERATURE Literature review distills the existing literature in a subject field; the objective of the literature review is to summarize the state of the art in that subject field. From this review of earlier and recent work, it becomes possible to identify areas in which further research would be beneficial. Indeed, the concluding paragraphs of the literature review should lead impeccably to research propositions and methodologies. It is therefore important that the literature review is focused, and avoids the more comprehensive textbook-like approach. There are large numbers of empirical exercises, which attempt to measure and understand the causes of inflation. For developing countries with embryonic financial sectors, a monetarist, demand-pull or structuralist theory of inflation may be more appropriate. This chapter attempts to review some empirical studies on inflation focusing on large groupings as well as those of individual country studies (both international and also national level studies). There are some studies which examine inflation processes in the region as a whole - the group of countries taken together. For example, Vogel (1974) developed a monetary model for explaining inflation in Latin America. The author's model considered the rate of inflation (Pt) as a dependent variable and the percentage change in money supply during current and previous years (Mt, and M t-1), percentage change in real income during current period (Yt) and change in inflation rate lagged by one year and two years (Pt and P t-1) as explanatory variables. Vogel (1974) concluded that the coefficients of Mt and M t-1 are highly significant and thus indicate that an increase in the rate of growth of money supply causes aproportionate increase in the rate of inflation within two years. At the same time the rate of inflation is found to be inversely influenced by the growth rate of real income. The rate of inflation is not found to be so much influenced by (Pt-1– Pt-2), rather inflation rate lagged by one year, Pt-1 has much influence on the current rate of inflation. The increase in the last equation above is mainly attributed to the high significance of Pt-1. Similarly, McCandless and Weber (1995) looked at inflation in 110 countries during a 30- year period. The study concluded that inflation and monetary aggregates are positively correlated in the long run. However, as the time horizon shortens, the correlation falls.
  8. 8. 8 Campillo and Miron (1996) examine the determinants of inflation across 62 countries over the period 1973 - 1994 by considering the distaste for inflation, optimal tax considerations, time consistency issues, distortionary non-inflationary policies and other factors as important determinants of inflation. Inflation rate is measured by the Consumer Price Index (CPI). The authors' have adopted Ordinary Least Squares (OLS) technique with standard error, estimated by White (1980) procedure. They found economic fundamentals like economic openness and optimal tax considerations are relatively important determinants of inflation whereas institutional arrangements like central bank independence or exchange rate mechanisms are relatively less important. Razzak (2001) examined the New Zealand experience from a monetary perspective and showed that the time series correlation between inflation and monetary aggregates was high only during high-inflation periods and disappeared when inflation was low. Likewise, Lissovolik (2003) examined the transitional economy of Ukraine from a monetary and structural perspective using monthly data over the period 1993 - 2002 and concluded that money, wage and exchange rate largely affect inflation. Maliszewski (2003) examined inflation-determinants in Georgia and the relationship between prices, money and exchange rate over the period 1996:1 to 2003:2. The sutdy found that exchange rate is the dominant determinant of inflation. Also, Blavy (2004) examined the dynamic of inflation in Guinea using a simple monetary model. There are many other country studies around the world but focus is given on three studies which share similar situation to Nepal. These are the studies of Albania, Swaziland, and Pakistan. In the study on inflation, Nepal Rastra Bank, Price Division and Economic Analysis Division (2006) in a very quick and simple study using open economy monetary model, has found Indian inflation to have a significant and near unitary effect on inflation in Nepal. This interpretation resulted from empirical regression utilizing Ordinary Least Square (OLS) on annual time series data over 1975 to 2006. The explanatory variables are growth rates of real GDP, money supply (both narrowly and broadly defined), interest rate on fixed deposit and Indian inflation. However, the deficiency of this quick study is that there was no further exercise regarding long-term relationships and thus considerations for short-term adjustment pathways.
  9. 9. 9 CHAPTER III RESEARCH METHODOLOGY 3.1 METHODOLOGY OF STUDY Research methodology is the plan, structure and strategy of investigations conceived to answer the research question or test the research hypothesis and to control variance. Research methodology refers to the various sequential steps to adopt by a researcher in studying a problem with certain objective in view. It describes the methods and process applied in the entire subject of the study. It is the way to study systematically about the research problem. In order to complete the report various methods will be applied. The data will be collected from secondary sources. Most of the information will be gathered through the use newspaper, magazines, articles, published documents, websites etc. It includes research design, sample size and selection process, data collection procedure and data processing techniques and tools. 3.2 RESEARCH DESIGN A research design is the arrangement of condition for collection and analysis of data in a manner that aims to combine reference to the research purpose with economy in procedure. The research design is followed to analyze the dynamics of inflation in Nepal. 3.3 SOURCES OF DATA This study was conducted on the basis of secondary data. The main source of secondary data comprises related journals, newspapers, Internet, official publication, related studies and thesis etc. 3.4 DATA COLLECTION PROCEDURE The relevant data will be collected visiting the website of Nepal Rastra Bank. The review of related study will be based on textbooks, official publications, various journals etc. 3.5 METHODS OF ANALYSIS AND PRESENTATION The collected data during the fieldwork will be classified into different categories as per their nature and the purpose of the study. Later, they will be thoroughly analyzed. The category of
  10. 10. 10 data will be about to be descriptive analytical. The relevant data will be presented in tabular form and their relationship will be shown in diagram. The data will be analyzed comparing them.
  11. 11. 11 CHAPTER IV DATA ANALYSIS AND FINDING 4.1 INFLATION IN NEPAL The price level and its growth, inflation, is an important economic indicator. There are various indices which measure the price level, such as; consumer price index (CPI): wholesale price index (WPI); sensitive price index (SPI); gross domestic product (GDP) deflator and so on. In Nepal, there are three main price indices, namely: the CPI; the WPI; and the Salary and Wage Rate Index (SWRI). The main focus for measuring the cost of living is placed on CPI. This is because CPI measures inflation impact which is the final measure of prices on households. 4.2 INFLATION MEASUREMENT IN NEPAL Nepal Rastra Bank (NRB), the central bank of Nepal, has been constructing various price indices, calculating inflation and making it public through its website (www.nrb.org.np) and various publications on monthly and yearly basis. Accordingly, the NRB from the first months of FY 2010/11 has made public the new series of Consumer Price Index (CPI) based on the final report of Fourth Household Budget Survey (2005/06). Since then, the NRB has been measuring year on year (y-o-y) CPI inflation taking 2005/06 as a base year by replacing the previous base year of 1995/96. The new CPI series is constructed based on the prices of 410 commodities from 33 market centers of the country. In addition, the NRB also measures WPI and core CPI inflation on monthly and yearly basis. 4.3 INFLATION IN CONTEXT OF NEPAL Since some years back, Nepal is suffering from the rapidly growing inflation because of many economic and political factors. The necessity of spurting economic growth is essential for Nepal, a land-locked least developed country in south Asia. Nepal Rastra Bank report has said, Inflation in Nepal is showing no signs of easing even though the wholesale price index touched a 30-year low in neighboring country India, on which the Nepalese economy is heavily dependent. After having low inflation averaging 3.6 percent from 2000 to 2005 Nepal Rastra Bank (NRB), the country’s central bank, has come up with a staggering 13.5%
  12. 12. 12 inflation figure - a demoralizing fate while people are cash-strapped and having to succumb to decaying income and loss of jobs. Year 2005 2006 2007 2008 2009 2010 2011 Rate (%) 7.8 8.6 6.4 7.7 13.2 9.3 9.9 This diagram indicates that there is high inflation in 2009 and low inflation in 2007. The inflation rate of Nepal in 2011 is 9.9%. 4.4 CONSUMER PRICE INFLATION The y-o-y inflation as measured by the consumer price index increased by 7.5percent in mid April 2012 as compared to 10.6 percent in the corresponding period of the previous year.
  13. 13. 13 Region-wise, the price indices in Hill increased by 8.4 percent followed by Terai 7.8 percent and Kathmandu Valley 6.4 percent during the review period. The respective increment rates were 11.9 percent, 8.2 percent and 12.9 percent respectively in the corresponding period of the previous year. This data can also be graphically represented as below: 4.5 WHOLESALE PRICE INFLATION The y-o-y wholesale price index increased by 6.6 percent during the review period compared to a rise of 11.5 percent in the corresponding period of the previous year. Commodities April 2011 April 2012 Food and beverage 17.3% 21.9% Non-food and service 5.3% 10.1% Ghee and oil 5.3% 15.6% Milk product, and egg 16.3% 12.5% Hotel and restaurant 15.2% 12.5% Vegetables 61.1% 10.9% Hard drinks 2.1% 9.2% Tobacco products 9.0% 17.1% Meat and fish 8.0% 6.4% Spices 21.1% 12.3% Cereals products 13.4% 3.0% Transport 17.8% 11.4% Clothing and footwear 16.9% 15.1% Furnishing and household equipments 8.3% 13.6% Miscellaneous goods and services 5.7% 10.8%
  14. 14. 14 Commodities April 2011 April 2012 Imported commodities 8.8% 14.3% Domestic manufactured 9.1% 8.1% Agricultural commodities 13.9% 2.0% Fruits and vegetables 28.9% 17.1% Cash crops 9.3% 3.6% Livestock production 12.7% 13.7% Spices 41.0% 18.4% Food grains 12.8% 3.1% Under the group of domestic manufactured commodities, the wholesale price indices of food-related products and beverages and tobacco increased by 12.8 percent and 7.1 percent respectively during the review period .Likewise, of construction material increased by 6.1 percent during the review period. Within the imported commodities group, the wholesale price indices of petroleum products and coal and textile-related products increased by 27.8 percent and 25.0 percent respectively during the review period. The price indices of electric and electronic goods, and transport vehicles, and machinery goods are increased by 12.3 percent and 7.0 percent respectively during the review period. 4.6 CAUSES OF INFLATION IN NEPAL The causes of inflation in our country considering the current situation are as follows: Political Insurgency The volatile political situation has played a vital role in the increment of all commodities. The impractical government amended rules and regulation have helped to make the situation worse. The unclear motive of government regarding economic sector also has caused the living standard of the normal citizen to degrade. Pressure tactics Maoist party in particular has badly hampered the economic activities of the whole country. The illegal donations, shutdown of major industries had created an imbalance in the demand and supply of goods and services.
  15. 15. 15 GDP and Per capita income in decreasing trend but increase in price level The GDP of Nepal is in decreasing trend whereas the price level is increasing yearly. As per the National Income view, the contributions to GDP have major impact on the economic aspect of the country. The increasing levels of prices add fertilizer to the increasing rate of inflation. Natural causes Due to flood and landslides that took place a month ago has also helped in increasing the inflation rate. The agricultural lands have been degraded due to natural calamities. Growing concrete jungles At present time all we see around us are concrete buildings. Fertile lands have been used for real estate purpose. If this trend goes on for a long time, we can clearly predict that the inflation rate is undoubtly going to rise especially for food items. High labor cost The prices of items are also high because of the labor costs is very low mainly in terms of people who get paid on daily basis. Transportation charges Transport entrepreneurs have ganged up to overprice transportation costs because of rise in price of petroleum products. Price of petroleum products Price of petroleum products has been adjusted several times on the higher side. Such adjustments helped pushing the cost of freight and carriages and cost of other goods and services. Transmission through trade Furthermore, rising inflation in India is transmitted in Nepal through trade, which is one of the significant factor of increasing inflation rate of Nepal.
  16. 16. 16 Seasonal constraints Seasonal constraints also prompted to push the inflation up in the past. For example, price rise on sugar and sugar made products, vegetables, fruits etc. 4.7 IMPACT OF INFLATION (IMPLICATIONS) TO BUSINESS MANAGERS Business environment is a dynamic phenomenon. It never remains constant. One of the factors which make it such dynamic is Inflation. Inflation abruptly affects the business. It may be vice for many people but it can be turned out to be virtue for business managers if they have got the capability to cope it effectively. Only a manager with farsightedness can turn this negative situation in their favor. A business manager must have this capability in order to survive in the global market. Sometimes, according to the rate of inflation, managers have to make very complex decisions. Hence, market inflation rate makes the task of every manager somehow critical and complex. Following are some of the implications of Inflation to business managers or business environment. Fall in purchasing power of money: High inflation redistributes the income of people. The fixed income earners and those lacking bargaining power will become relatively worse off as their purchasing power falls. Demand for higher rate of wages: Trade unions may demand for higher wages at times of high inflation. If the claims are accepted by the employers, it may give rise to a wage-price spiral which may aggravate the inflation problem. Undermine business confidence: During a high inflation period, wide fluctuations in the inflation rate make it difficult for business organizations to predict the future and accurately calculate prices and returns from investments. Therefore, it can undermine business confidence. Decrease in export leads to trade deficit: When inflation in a country is more than that in a competitive country, the exports from former country will be less attractive compared to the other country. This means there will be fewer sales for that country’s goods both at home and abroad and that will create a larger trade deficit. At the same
  17. 17. 17 time, high inflation in a country weakens its competitive position in the international market. Product quality issues: The managers have to meet the rapid demand of the market so to fulfill that they make rapid supply which affects the product quality. Change in production volume pattern: The production volume pattern will change as demand will be high. A good strategy is needed to meet the needs of public. Higher rediscount rate of central bank: The rate at which NRB buys or rediscounts the eligible bill of exchange and the other approved commercial papers represented by the commercial banks will be high. Distort in consumer behavior: High inflation distorts consumer behavior. Because of the fear of price increases, people tend to purchase their requirements in advance as much as possible. This can destabilize markets creating unnecessary shortages. 4.8 SUGGESTIONS TO MINIMIZE INFLATION IN NEPAL Analyzing the current inflation situation of Nepal, we found the need of some policy initiations. Such initiations will certainly show positive sign in Nepalese economy and businesses. They are stated as follows: Control on food price inflation: Rising inflation in Nepal has been mainly driven by food price inflation. So we must seek out to solve the issue of price hiking in food products by providing subsidies and following the policy of protectionism in food products. Need of structural changes in economy: The changing pattern of inflation may reflect structural changes in Nepal’s economy including, for example, rising imports as a share of GDP, and policy makers should be alert to these changes as they may cause inflation to be more volatile and persistent. Need of active conduct of Monetary Policy: Since monetary measures are most effective measures to control Inflation, more active conduct of monetary policy in light of the existing high inflation should be considered. Tightening the fiscal policies: Tightening fiscal policies such as taxation, expenditure and public borrowing is seems to be essential to control current inflation rate rising.
  18. 18. 18 Effective and sufficient supply: Supply side deficiency is also an important factor of price hiking. So the supply side must also be strengthened to contain inflation within the target. Timely announcement of the government's policy: Due to various political reasons, the announcement of policies and plans is being delayed. Timely announcement of the government's policy, program and budget for the fiscal year should be ensured to control inflation to the some extent. 4.9 COMPARISON WITH INDIA CHINA AND USA In percentage Nepal India China USA Year Inflation Year Inflation Year Inflation Year Inflation 1995 7.677 1995 10.22 1995 17.07 1995 2.81 1996 7.179 1996 8.98 1996 8.33 1996 2.93 1997 8.101 1997 7.25 1997 2.81 1997 2.34 1998 8.326 1998 13.17 1998 -0.78 1998 1.55 1999 11.379 1999 4.84 1999 -1.4 1999 2.19 2000 3.393 2000 4.02 2000 0.35 2000 3.38 2001 2.435 2001 3.77 2001 0.73 2001 2.83 2002 2.896 2002 4.31 2002 -0.73 2002 1.59 2003 4.743 2003 3.81 2003 1.13 2003 2.27 2004 3.963 2004 3.77 2004 3.84 2004 2.68 2005 4.539 2005 4.25 2005 1.78 2005 3.39 2006 7.963 2006 5.79 2006 1.65 2006 3.24 2007 6.203 2007 6.39 2007 4.82 2007 2.85 2008 6.687 2008 8.32 2008 5.97 2008 3.85 2009 12.626 2009 10.83 2009 -0.72 2009 -0.34 2010 9.556 2010 12.11 2010 3.17 2010 1.64
  19. 19. 19 Interpretation By analyzing the above comparative table, there is high fluctuation of inflation rate in Nepal. The inflation has been changed by 3 % to 5 %. However, in the year 2009 the inflation rate was raised by more than 5 %. In India the inflation has been raised by 2 % to 3 %. However, in 1998 the inflation rate was raised by more than 5 %. In the case of China the inflation rate has been raised in the ratio of 2% to 3%. There is deflation in the years 1998, 2002 and 2009. In the year 1996 the inflation rate was decreased from 17.07% to 8.33%. After 1996 the inflation rate is below 5%. The inflation rate of USA is below 5%. There is nominal rate of fluctuation in the inflation. These nominal rates of fluctuation are very essential for the development of the economy.
  20. 20. 20 CHAPTER V SUMMARY, CONCLUSION AND RECOMMENDATION 5.1 SUMMARY Inflation is a rise in the general level of prices of goods and services in an economy over a period of time. When the general price level rises, each unit of currency buys fewer goods and services. Different economists understand and define the concept of inflation in different ways. But in generally inflation refers to a situation of continuously rising prices of commodities and factors of production. On different grounds, economists have classified inflation into various types. According to the rate inflation there are four types of inflation. These are moderate Inflation, running Inflation, galloping Inflation and hyper Inflation. But there are two types of inflation on the basis of Cause of Origin: they are Demand Pull Inflation and Cost Push Inflation .similarly on the basis of government reaction or control inflation can be two types: they are open & suppressed inflation. There are large numbers of empirical exercises, which attempt to measure and understand the causes of inflation. For developing countries with embryonic financial sectors, a monetarist, demand-pull or structuralist theory of inflation may be more appropriate. This report is important to those stakeholders who want to know about the inflation. This report is significant to researcher, students, government, various organizations etc. Some of the major findings of the study are: Inflation of higher rate will affect the economy negatively as it generates different problems in capital formation and also changes the distribution of wealth of the economy. Inflation of smaller rates can provide positive impact in the economy as it increases the employment and moves towards economic development. Higher inflation decreases the purchasing power of the people, so huge amount of money is needed to buy the single unit of product. The moderate level of inflation very essential for the development of the economy. It discourages foreign investments and less capital is funded thus production decreases.
  21. 21. 21 5.2 CONCLUSION In economics, inflation is a rise in the general level of prices of goods and services in an economy over a period of time. Inflation is the result of excess of aggregate demand over the aggregate supply and the true inflation starts after full employment. The rise in price level before full employment is semi-inflation. Inflation plays a vital role for the development of the economy. The inflation rate must be at moderate level. For developing countries 3% to 4% raise of inflation could be acceptable but in developed country it must be 1% to 2% only. Central bank of the country plays the vital role in controlling the inflation rate and other related economical activities. When inflation rate is raised highly it decreases the purchasing power of the people and cost of product would be costlier. However it not only decreases the purchasing power of the people but also affects the import, export ratio, production activities, and employment activities and so on. So the inflation rate must be controlled proper by the central bank of the particular country. In the context of the Nepal, the inflation trend in Nepal is in fluctuating order. There is moderate level of inflation. In recent years the inflation rate has been decreased. In 2011 the inflation rate of Nepal was 9.9%. 5.3 RECOMMENDATIONS Given this conclusion, the study makes recommendations are as follows:  To establish a mechanism to continuously monitor price developments in India to ensure harmonization of domestic regulated prices (e.g. petroleum products etc.). This is because with significant differences in the regulated prices between India and Nepal, high level of arbitrages in border areas becomes common practices and thereby affecting Nepalese inflation.  To refine monetary policy formulation based on the above results. Presently, monetary policy is geared toward maintenance of price stability. However, the empirical exercise of the bank suggests that the main contributor for inflation in the country is from India. This has implication and suggests that NRB should rethink before commencing activities for having an inflation-targeting framework. Also and given that the exchange rate policy is maintained, it is important to refine monetary formulation in this regard.

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