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Factors that influence inflation

Despite nine fuel price cuts last year, the fall in the price of goods and services was a mere 0.5%

Inflation: The country’s annual inflation last year was at 8.27 percent, a drop by 0.5 percent from 2013.

The year-on-year inflation in January last year climbed to 10 percent, which, by the yearend, slid to 6.38 percent.  This means, the price of goods and services between January 2013 and 2014 increased by 10 percent, and this dropped to 6.38 percent in the same period in December.

Director general of the National Statistical Bureau (NSB), Kuenga Tshering, said inflation is sometimes seasonal.  For instance, the price of vegetable shoots up when the farming season is off.

Another factor contributing to the inflation, he said, was the fuel price, which saw nine straight falls within a year.

“The fuel price drop has led to cheaper transportation and goods ultimately became cheaper,” he said.  The consumer price index also reveals that price inflated by five percent between August 2013 and August 2014.  However, as fuel prices dropped, Monthly inflation has declined, from 2.6 percent in September to 1.8 percent in October and 0.3 percent in November.

Consequently, because of cheaper transportation, inflation on food items also fell from 11 percent in July to 6 percent in November.  Similarly, in nonfood group, inflation dropped from 8 percent in August to 7 percent in November.

Economists said the electricity tariff revision by 15 percent last July, tax revision, increase in house rents, following the pay revision, and lifting of various import restrictions could have upturned further decrease in inflation, which was why the change compared with 2013 was only 0.5 percent.

Kuenga Tshering also agreed that, theoretically, the lifting of import ban should impact inflation.  However, there is monetary policy in place to control inflation, which the banks can implement.

For example, when banks circulated huge amounts of money, purchase of consumer goods increases and the banks can control the money supply by increasing the interest rates.  An increase in the supply of money typically lowers interest rates, which, in turn, generates more investment and puts more money in the hands of consumers, thereby stimulating spending.

Another tool is the cash reserve ratio (CRR), or the minimum requirement that commercial banks must set aside from their deposit with the central bank.  Higher CRR requirement translates into less money with banks to lend.  Usually when inflation rate increases, the central banks increase the CRR to reduce money supply.

The director general, however, said inflation had a lot to do with elasticity of various goods and services.  A good or service is considered to be highly elastic, if a slight change in price leads to a sharp change in demand or supply.

For instance, inelastic goods like fuel, where there are no substitutes, would impact inflation, since demand may not fall, irrespective of an increase or decrease in price.

Another economist also said the fluctuation in exchange rate between INR and USD could also affect inflation.  This was because, when USD appreciates against the INR, Indian firms acquiring goods from third countries, end up paying more.  The increase in expenditure that Indian companies bore is then transferred to their buyers, including Bhutanese.

Meanwhile, in 2012, the country recorded the highest annual inflation of 10.9 percent, which is largely attributed to the rupee shortage.  Rupee shortage inevitably led to scarcity in goods imported from India and, in turn, led to a price rise.

While policy makers and economists have been linking the country’s inflation to that of India, price rise in housing and electricity equally contributed to it.  Which means that domestic inflation also equally contributed to the overall inflation.  Almost half, of the inflation is derived from within or domestically, according to NSB.

By Tshering Dorji

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