What is inflation?

You must have noticed that your household budget may have increased in the last few months and now you will be spending more money on everyday needs. This situation is called inflation. That is, inflation only means that your expenditure has increased. While the income has not changed much.

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Inflation and economic slowdown are heading towards you and you need to be careful before your monthly income becomes half of what it was before and expenses double. Consumer Price Index i.e.inflation in Nepal is the highest in the last 20 years(approx). Not only in Nepal, at this time inflation is at its peak in big countries like America, Britain, and Germany. The currency of every major country of the world is falling and the stock markets around the world are crashing. All these symptoms are of economic slowdown and if there is an economic slowdown then everything from your job to business will be in danger.

How is the Consumer Price Index Determined?

The Consumer Price Index (CPI), is widely used to measure inflation, is determined by tracking price changes in a market basket of consumer goods and services over a period of time.NRB is the domestic authority that collects price information and constructs the CPI index. The CPI index captures the average household's consumption basket. This basket is determined by national-level Household Budget Surveys (HSB). The objective of the survey is to make a more representative basket in terms of cities, markets, items, and weights for different commodities, incomes, and occupations of the people. As per Trading Economics, Consumer Price Index CPI in Nepal is expected to be 148.88 points by the end of this quarter, according to Trading Economics global macro models and analysts' expectations. In the long term, the Nepal Consumer Price Index CPI is projected to trend around 161.83 points in 2023 and 170.57 points in 2024.

However, this situation is not only in Nepal. Inflation has reached historic levels all over the world. At present the highest inflation is in Turkey. In Turkey, after 24 years, the inflation rate has reached a record level of 73.5 percent. In the US, after 41 years, the inflation rate is more than 8 percent. In the UK, after 40 years, the inflation rate has touched the figure of 9 percent. In Germany, after 50 years, the inflation rate has been recorded at 7.9 percent. Apart from this, this figure is 8.1 percent in Europe, 11.7 percent in Brazil, 17 percent in Russia, and after two and a half years in Pakistan, the inflation rate has reached the level of about 14 percent in May. The inflation rate of India is 7 percent. While the inflation rate in Nepal is still very low compared to these countries. The inflation rate in Nepal is only around 5.8% percent.

Now when inflation increases in this way all over the world, it becomes expensive to do business and it directly affects different currencies of the world. That is, with the increase in inflation, the currency of every major country of the world is falling. This year the pound has weakened by 11 percent against the dollar. The pound is the currency of Britain. Similarly, the currency of Europe has weakened by 7.6 percent against the Euro, Dollar. Japan's currency Yen has fallen by 17.2 percent, which is historic. Apart from this, the Chinese currency Yuan (Yuan) has also weakened by 5.6 percent against the dollar this year and the value of our country's currency has also fallen by 4.7 percent against the dollar. At present, India's 78.15 rupees are equal to one dollar. This is the first time in the history of India that the rupee has weakened so much against the dollar. Being Nepalese currency fully dependent on Indian currency, Nepal’s 125.21 rupees is equal to one dollar(USA).

What is the reason for this negative trend?

Now the big question is why this negative trend is visible all over the world. One of the major reasons for this is the increased interest rates by central banks. There are big banks in every country, which fix the interest rates. There is the Nepal Rastra Bank of Nepal in Nepal. Now it happens that when inflation starts increasing due to different reasons, then these central banks increase the interest rates and when the interest rates increase then the EMI of the loan you have taken becomes expensive.

For example, NRB last month raised interest rates from 6.8966 percent to 7.0226 percent (Weighted Average Interbank Rate, Daily) and NRB is not the only bank in the world to do so. Interest rates have been increased by central banks in more than 50 countries of the world, due to which the EMI of loans in these countries has become expensive. Now you must be thinking, why do the central banks increase the interest rates when inflation increases, so let us also explain its mathematics to you today. For example, NRB is called the bank of Banks in Nepal. That is, if NRB increases interest rates while giving loans to banks, then in return your bank can also increase your interest rates or EMI. Now you must be thinking that in order to reduce inflation, NRB should reduce the interest rate so that people can save more money. Then why do NRB and other central banks increase interest rates?

Why did NRB increase interest rates?

So the answer is that if banks reduce interest rates, then people will have more money left and in such a situation people will buy more goods i.e. demand will increase while supply will remain the same as before. This will further increase inflation. Because there will be a big gap between demand and supply and for this reason, these interest rates are increased.

Stock market fall

There has been a significant decline in the stock market of Nepal this year. Nepse has declined 26.87 percent in this quarter. And due to this fall in the stock market, Billions of rupees of investors were sunk. When people invest less in the stock market, it also reduces the confidence of the investors in the market and they start withdrawing their money from the stock market. When this happens, the stock markets start falling and it is a sign that the economy of that country is going towards crisis.

When the stock market of any country falls by 20 percent, it goes to the Bear Territory. Bear territory means that investors panic due to a stock market crash, they start withdrawing their money from the market and a panic situation is created.