Nepal’s average annual inflation trends reveal deep economic pressures on households and markets

KATHMANDU: Nepal’s average annual inflation data over the past nine fiscal years presents a clear picture of how price instability has steadily reshaped the economy, strained household finances, and complicated monetary policy, highlighting inflation control as one of the country’s most critical macroeconomic challenges.

According to official figures, Nepal’s annual average inflation stood at 4.5 percent in 2016/17 and eased slightly to 4.2 percent in 2017/18. The rate climbed again to 4.6 percent in 2018/19 before jumping sharply to 6.15 percent in 2019/20, reflecting supply disruptions and rising import costs.

Inflation moderated to 3.60 percent in 2020/21 as pandemic-induced demand contraction reduced price pressures, but rebounded strongly to 6.32 percent in 2021/22 and peaked at 7.74 percent in 2022/23. It later declined to 5.44 percent in 2023/24 and further to 4.06 percent in 2024/25.

This trajectory shows that Nepal has experienced repeated inflationary waves rather than stable price growth, creating persistent uncertainty for consumers, investors, and policymakers alike.

Erosion of Purchasing Power

For ordinary Nepalis, inflation has directly translated into higher living costs. Food, fuel, housing, education, and healthcare expenses have consistently outpaced wage growth, reducing real incomes.

When inflation crossed 7 percent in 2022/23, households faced sharp increases in essential commodities, particularly rice, cooking oil, vegetables, and transport fares.

Middle- and low-income families were hit hardest, as a larger share of their income is spent on basic consumption.

The steady rise in prices has forced households to cut discretionary spending, reduce savings, and rely more heavily on remittances, reinforcing Nepal’s structural dependence on foreign income inflows.

Pressure on Monetary Policy and Interest Rates

Rising inflation has constrained Nepal Rastra Bank’s monetary flexibility. To contain price pressures and defend foreign exchange reserves, the central bank was compelled to tighten liquidity and maintain relatively high interest rates in recent years.

Higher borrowing costs, while necessary for macroeconomic stability, have slowed private sector credit expansion.

This has affected small and medium enterprises, construction, real estate, and manufacturing—sectors that are vital for job creation and economic recovery.

Thus, inflation management in Nepal has become a delicate balancing act between price stability and growth stimulation.

Import Dependence and Global Spillovers

Nepal’s inflation is structurally linked to its heavy reliance on imports, particularly from India. Fuel, food, fertilizer, and industrial raw materials are largely imported, meaning global price shocks are quickly transmitted into domestic markets.

The surge in inflation during 2021/22 and 2022/23 coincided with global supply chain disruptions, energy price spikes, and the Russia-Ukraine war, demonstrating Nepal’s vulnerability to external shocks.

This imported inflation has widened the trade deficit and exerted pressure on foreign exchange reserves.

Impact on Investment Climate

Persistent inflation undermines investor confidence by increasing uncertainty around costs, returns, and long-term planning. Businesses face rising production expenses, from raw materials to transportation and wages, which compress profit margins.

In an economy already seeking to attract foreign direct investment (FDI) and stimulate domestic entrepreneurship, unstable inflation complicates project viability assessments and discourages long-term capital commitments.

Government Finances and Development Spending

Inflation also inflates government expenditure, particularly on salaries, social security, subsidies, and public procurement. Rising costs reduce the real value of development budgets, limiting the state’s capacity to deliver infrastructure and social services effectively.

When inflation remains elevated, fiscal planning becomes more difficult, increasing the risk of budget overruns and weakening public investment efficiency.

Signs of Stabilization, But Risks Remain

The decline in inflation to 5.44 percent in 2023/24 and 4.06 percent in 2024/25 offers cautious optimism. It suggests that tighter monetary policy, improved supply conditions, and global price normalization are beginning to ease domestic pressures.

However, Nepal’s exposure to global commodity cycles, climate-related food supply risks, and structural import dependence means inflation remains a persistent threat.

Need for Structural Reforms

Economists argue that lasting inflation control requires more than monetary tightening. Nepal must strengthen domestic production, modernize agriculture, expand energy generation, and improve logistics and market efficiency.

Reducing import dependence, enhancing productivity, and stabilizing supply chains are essential to protect livelihoods and ensure sustainable economic growth.

Nepal’s inflation history over the past decade shows that price stability is not merely a technical macroeconomic target—it is central to social welfare, investment confidence, and long-term development.