Money supply soars, inflation remains unchanged
KATHMANDU,DEC 4:
Despite the massive surge in money supply, inflation seems to have remained unmoved by the third month of the current fiscal year, deepening the unpredictability between money supply-price relation.
Broad money increased by 6.8 per cent during the three months while inflation crept a little to 8.9 per cent during the period, according to the central bank. Narrow money supply has also increased by 4.9 per cent. “It is quite unbelievable that inflation during the period did not shoot up much despite the fundamentals like fuel prices going up and increased amount of incoming remittance that have contributed in increasing the money supply,” said economist Dr Chiranjeevi Nepal. Theoretically, when the money supply decreases inflation also goes down and vice versa. However, in Nepal’’s context low money supply does not always translate as lower price rise as half of the economy being dominated by the informal sector.
The empirical studies show that, in Nepal, 10 per cent increment in money supply results in inflating the price level by three to four per cent. The year-on-year inflation as measured by the consumer price index increased by 8.9 per cent in mid-October 2011 as compared to 8.5 per cent of the previous month. Corresponding period last fiscal year had seen the general price level at 8.9 per cent, according to macroeconomic report for second month of the current fiscal year published by Nepal Rastra Bank (NRB).
“It is appreciable that economic indicators are getting better but such unreasonable and overnight improvement makes one suspicious about the reality and transparency of the data,” expressed Nepal. “The same report released by NRB say that price of vegetables, clothing, transport and similar amenities have gone up, but the general price level has been affected marginally,” he added.
Price index of vegetables rose by the highest rate of 42.5 per cent during the review period along with increment of price of clothing by 15.4 per cent and transport fares have also gone up by 8.2 per cent. The monetary policy for the current fiscal year has targeted to tame down inflation at seven per cent through money supply of 12.5 per cent. However, money supply of 9.5 per cent was able to restrain the inflation to 9.6 per cent last fiscal year unlike the estimation of seven per cent inflation with 15 per cent money supply. In the fiscal year preceding last, annual inflation stood at 9.6 per cent while money supply was at 14.1 per cent.
Likewise, year on year wholesale price index increased by 6.1 per cent during the review period compared to a rise of 7.1 per cent in the previous month.
Source: THT
