Official CPI fails to capture real inflation shock as Nepali households face far higher price pressures

KATHMANDU: Nepal’s official Consumer Price Index (CPI) continues to show moderate inflation on paper, but the reality for millions of Nepali consumers tells a sharply different story. A review of the government’s own technical documentation on CPI compilation reveals structural flaws, outdated market baskets, and statistical limitations—issues that directly explain why the official inflation figures do not match the real-life rise in household expenses.

The recently examined Report on Compilation of Consumer Price Index in Nepal shows that the index heavily relies on fixed expenditure weights derived from an older Household Budget Survey, a method that no longer captures today’s consumption pattern. The report itself acknowledges that the CPI uses fixed weights at a given point of time

—a practice that experts say can severely distort inflation estimates when the economy and consumption structure change as fast as Nepal’s has over the past decade.

At a time when the public is grappling with surging food prices, rent hikes, and rising transportation costs, the gap between the official inflation rate and lived experience has widened alarmingly, raising questions about the accuracy of Nepal’s macroeconomic indicators, the credibility of government reporting, and the effectiveness of monetary policy calibrated on these numbers.

CPI Based on Old Weights Fails to Capture Today’s Household Spending

The government’s CPI is built on Laspeyres formula, which keeps expenditure weights fixed. In theory, this ensures consistency. In reality, however, it means the CPI reflects what Nepali households used to buy, not what they buy now.

The report itself highlights this limitation clearly: Nepal’s CPI “makes use of fixed weights at a given point of time and the weights thus become less relevant over time” even though a Household Budget Survey is conducted periodically to measure changing expenditure patterns..

For households facing:

the official CPI ends up underestimating inflation, because the outdated basket assigns insufficient weight to categories where price hikes are the highest.

Consumers today spend far more on mobile data, electricity, packaged foods, health care, and private education than they did a decade ago. Yet these shifts are not reflected proportionally in the CPI.

Urban Bias Means Rural Inflation is Under-counted

The report explains that Nepal’s CPI uses area sampling and a mix of urban and rural weights, but acknowledges the CPI’s sensitivity to the “composition of the population” and sampling methodology.

In practice:

But these realities are smoothed out when combined with more stable urban prices, especially in major markets like Kathmandu, Pokhara, and Biratnagar. As a result, rural inflation is systematically understated, giving a misleading national inflation rate.

Imported Inflation Hidden by Methodological Gaps

Nepal’s economy is heavily dependent on imports—including fuel, food, raw materials, and manufactured goods. However, the CPI does not adjust weightings dynamically to reflect the growing share of imports in household consumption.

With India’s inflation feeding directly into Nepal’s prices and the global food and energy markets facing turbulence, actual market inflation in Nepal is significantly higher than the CPI suggests. But the CPI’s fixed basket and delayed updating process fail to capture the rapid price pass-through consumers face.

For instance:

The report highlights that CPI is sensitive to “seasonal variation” and may vary depending on “weather conditions” and “fluctuating demand”

Yet the CPI’s monthly methodology does not fully adjust for:

This is one of the biggest reasons the public feels inflation much more acutely than the official numbers indicate. Seasonal shocks rapidly raise market prices, but the CPI smooths these spikes out over a more stable index structure.

Real Inflation Feels Higher Because the CPI Underweights Essential Goods

But the CPI’s fixed weights dilute the impact of price hikes in these core sectors.

For example:

A 20–30% increase in cooking oil may barely move the CPI.

A doubling of rent affects millions yet contributes modestly to the index.

Soaring vegetable prices during monsoon cause severe household stress but have a smaller effect on the overall CPI.

Thus, the CPI signals “moderate” inflation, while the public experiences life-changing cost escalations.

CPI Does Not Track Quality Reduction (‘Shrinkflation’)

A growing trend in Nepal’s consumer market is shrinkflation—manufacturers reducing quantities while keeping prices constant. Households are paying more per gram or per liter, but the CPI largely overlooks such quality adjustments.

Examples include:

Market Substitution Ignored: When Prices Rise, Households Switch Brands or Items

The CPI assumes households continue buying the same items regardless of price increases. In reality, families switch to:

This behavioural shift is ignored by the CPI, which keeps tracking the same brands and items, even when the public no longer buys them in similar volumes.

Thus, CPI inflation remains low, but real inflation is high—because households are forced to compromise to survive.

Why This Mismatch Is Dangerous for the Economy

A CPI that underestimates inflation becomes misleading for:

1. Monetary Policy

The central bank sets interest rates based on CPI inflation. If CPI is understated:

2. Wage Negotiations

Labour unions, private industries, and government agencies use CPI for:

If CPI does not reflect real-life prices, workers’ wages fail to keep pace with the cost of living.

3. Social Protection Programs

Government relief programs, poverty assessments, and benefit distribution rely on CPI data. Underestimated inflation leads to:

4. Public Trust

When households feel price pressures far more than official figures suggest, confidence erodes in:

Experts Call for Urgent Overhaul of CPI Structure

Until these reforms take place, Nepal’s CPI will continue misrepresenting inflation—and households will continue feeling financial stress that official statistics fail to acknowledge.

A Growing Gap Between Paper and Reality

The government’s own CPI technical documents acknowledge that data collection is subject to fluctuating demand and market conditions that can affect accuracy and data relevance over time

. Combined with fixed weights and limited adaptation to structural economic change, Nepal’s CPI no longer mirrors the harsh inflation reality Nepali families face daily.

With rising market prices, declining purchasing power, and widespread public frustration, the official CPI—despite being meticulously calculated—has become increasingly disconnected from the lived experience of the Nepali people.

The mismatch is now impossible to ignore.