Prices that have gone up may not come down after crisis ends

Kathmandu, November 26

Go to an ordinary tea shop in Kathmandu and order a cup of that hot beverage, and you’ll end up paying at least Rs 15, which is 50 per cent more than in the recent past.

At grocery stores, you’ll have to pay Rs 650 for a 2.5-litre bottle of branded cooking oil, which used to cost Rs 550 two months ago. It’s the same with imported clothes their prices have gone up too.

Ask shopkeepers why goods are becoming expensive lately and they’ll give you the same answer: supply disruption due to protests in the Tarai and blockade at Nepal-India border points.

Supply-side constraints like these generally push up prices because they raise production and transportation costs.

For instance, many tea shop owners have to purchase kerosene or cooking gas from the black market, paying triple the actual retail prices. This has raised production cost, which is transferred to customers.

On the other hand, prices of foreign clothing items and goods, like cooking oil, have gone up because of hike in transportation cost. Also, many foreign goods have entered the country after being stranded at border points or the Kolkata dock for weeks, which has added to the cost. This cost is also passed on to customers.

The manner in which prices are going up in Nepal in recent days is not good for the economy, as it erodes the value of money and makes people feel poorer. But again this cannot be avoided at times of crisis.

“The latest price hikes are consequences of the current situation facing the country,” said Swarnim Wagle, senior economist and former member of the National Planning Commission.

So, can people expect prices to return to normal once normalcy is restored? Not always.

“Prices of goods, whose demand is inelastic, tend to be sticky. And this may create a situation of inflation persistence, which may have wider impact on the economy,” said Wagle.

What Wagle’s statement implies is that tea price, for instance, which has gone up, may not come down even after the current crisis is over, as it is one of the products whose demand does not fall drastically despite price hike. This may prompt tea shop owners to stick to the raised price even after the crisis is over, pushing up the price permanently.

This may also be true for other goods whose demand is inelastic, such as food products, including rice and cooking oil, clothing items and even house rents.

Kathmandu should be aware of this phenomenon because consumer prices here have already gone up at a higher rate than in other parts of the country.

Latest data of Nepal Rastra Bank show that prices of food and beverage in the Kathmandu Valley surged by an average of 10.2 per cent in October, as against 9.3 per cent in the Tarai and 9.4 per cent in other hilly areas. Also, prices of non-food items and services in the Valley went up by an average of 8.4 per cent in October, as against 6.4 per cent in Tarai and 8.2 per cent in other hilly areas.

“To bring the situation under control, concerned government agencies must closely monitor the market situation and introduce measures to bring down the raised prices after resolution of crisis.

Otherwise, inflationary pressure will remain intact, which could be detrimental for the economy,” said Madhusudan Pokharel, chief of the Financial Sector Management Division at the Ministry of Finance.