1. What is Inflation?? Inflation is the situation of the market disequilibrium in which prices of most of the goods and services persistently rise and the value of the money fall accordingly for relatively longer period of time. Inflation occurs when the amount of the money the purchaser of goods and services want to spend increases rapidly than the value of those goods and services supplied in the market at current prices. Different economists have defined inflation differently. Some popular definition is given below: G. Crowther, “Inflation is the state in which the value of money is falling i. e. prices are rising.
Inflation is usually associated with rising activities and employment. According to Milton Friedman, the Nobel Prize winner for economics in 1976, “Inflation is always and everywhere a monetary phenomenon. ” Paul Einzig,”Inflation is that state of disequilibrium in which an expansion of purchasing power tends to cause or effect of an increase in the price level. ” In this sense, Inflation is a monetary phenomenon. H. G Johnson, “Inflation may be defined as an annual rate of increase in the general level of prices. It is measured in the percentage rate. If this rate is increasing per year, Inflation occurs. ” 2. Types of Inflation:
Inflation is classified into different types on the basis of speed, nature and causes as follows: a) Inflation according to speed: Creeping: 10 – 30% increase in the price level during the period of 10 years. Walking: 5-7% increase in price level per annum. Jumping or Running: 10% or 20% increase in price level per annum. Galloping and Hyperinflation: price level increase at a thousand million % annually. b) Inflation according to nature Open inflation: actual rise in price without any government control. Suppressed inflation: prices are artificially controlled by the government. c) Inflation according to coverage
Comprehensive inflation: increase in prices of all commodities. Sporadic inflation: increase in price of only one commodity such as food grain. d) Inflation according to reason: Demand-pull inflation: this inflation takes place due to the demand for goods and services exceeding their total supply available at current prices. Cost-push inflation: it is the persistent rise in the general price level due to the increase in the costs of production. It can be due to following reasons:- Wage push Profit induced Deficit induced inflation: when government spends more money than income, it causes inflation. 3. Inflation trend in Nepal:
The inflation rate in Nepal is determined by the consumer price index, wholesale price index, wage rate index, monetary situation and other factors like low interest rate or inter-bank rate. The increase in the consumer price index and whole price index both raise in the increase in the inflation rate. The inflation is the general increase in the cost of goods that is a result of increase in wages. Since the cost of production is increased with the increase in wages, the final price charged by the producer or service provider is increased as well. In Nepal, Broad money supply, M2 has a lagged and temporary effect on inflation.
The inflation rate in Nepal was recorded at 9. 46% in March of 2013. Nepal Inflation Rate averaged 8. 37% from 1964 until 2013, reaching an all-time high of 30. 42% in May of 1966 and a record low of -11. 54% in May of 1967. In Nepal, the inflation rate measures a broad rise or fall in prices that consumers pay for a standard basket of goods. Table No: 1 Inflation rate in Nepal since 2000 to 2013 Year Annual Inflation rate 2000 2. 5 2001 2. 7 2002 3. 0 2003 5. 7 2004 2. 8 2005 6. 8 2006 7. 6 2007 6. 1 2008 10. 9 2009 11. 6 2010 10. 0 2011 9. 5 2012 8. 5 2013 9. 46 (Source: NRB Nepal Rastra Bank)
Figure No 1: Trend line of inflation in Nepal since 2000 Table No 1 and figure No 1 show the annual inflation rate of Nepal since 2000 to 2013. During 2000 the inflation rate of Nepal was low of 2. 5 and it gradually increased till 2003 and suddenly decline to 2. 8 in 2004. In 2005, the inflation rate raised to 6. 8 and 7. 6 in 2006 then 6. 1 in 2007. Then suddenly the inflation rate rose to 10. 9 in 2008 and 11. 6 in 2009. The inflation rate from 2009 slowly decline and now in 2012 it is 8. 5. Hence the trend of the inflation rate of Nepal shows that the inflation rate is in decreasing rate from 2009 till now.
But the inflation rate is quite high even though it is in the decreasing trend. It is 8. 5 currently. 4. 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. 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 undoubtley 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 factors of increasing inflation rate of Nepal. 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. Unnoticed causes: Policy manipulation: Far from the reality, previous analysis about inflation has embraced external factors (exogenous factors, e. g. weather, international price and exchange rate) than realizing the internal ones (endogenous factors, e. g. discount rate and interest rate). “The NRB is an inflation inducer because it plays five roles: monopoly issuer of currency, banker’s note, regulator of commercial banks, and lender of last resort and conductor of Monetary Policy.
Where, the Monetary Policy is a process which allows the NRB (as ordered by the government) to control the supply availability and cost (interest rate) of the money. It is self-evident that hence the cause of inflation is the policy manipulation by NRB bureaucrats. Within the field of Monetary Policy, the potential subversion of the underlying objective of price stability is understood by the jargon ‘time inconsistency’. There is a broad consensus that stable money is too important to be left to the day-to-day political process. Alternative to central banks: Once again, what we need are sound free banking foundations.
We do not have such foundations and are unlikely ever to get them if things continue as they are. Central banking is a non-market, centralized approach to monetary matters. A central bank is granted certain legal powers and privileges that are the means by which it attempts to manipulate selected macro-economic measures. It is an absence of any central monetary authority and the issuance of notes as well as deposit accounts by individual private banks. More generally, under a free-banking structure, “banks are free to pursue whatever policies they find advantageous in
issuing liabilities and holding asset portfolios, subject only to the general legal prohibition against fraud or breach of contract”. Private Banks issue better currency, but central banks issue currency today not because they have out-competed the private banks at attracting loyal customers but because their sponsoring government outlawed private competition. This is especially obvious in countries where the public has every reason not to believe the central bank’s promise to redeem its currency. A central bank is a breach of freedom and private property, which needs to be abolished.
5. 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 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. 6. Economic and Monetary Targets:
The primary objectives of monetary policy of 2011/12 are controlling inflation pressure coming from excessive expansion of money supply, maintaining favorable BOP situation and facilitating economic growth by maintaining financial stability. The supply side must also be strengthened to contain inflation within the target. As the monsoon of this year began on time, agricultural production is expected to be satisfactory. Similarly, government capital expenditure is also expected to be effective because of the timely announcement of the government’s policy, program and budget for this fiscal year.
The production of both industrial and service sector will be expected to increase if labor relations and electricity supply improved and favorable industrial climate created. On the backdrop of the above domestic economic outlook, the target of the annual average inflation rate is set at 7 percent for 2011/12. The economic policies in neighboring countries as well as at the global level, which are directed towards controlling inflation, are also expected to help maintain inflation at the targeted level. 7.
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. 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.