Inflation Falls Sharply as Food Prices Ease, but Cost Pressures Persist in Services and Wages

Nepal’s inflationary pressure continued to ease in mid-January (Poush 2082), with annual point-to-point consumer inflation dropping to 2.42 percent, according to Nepal Rastra Bank. This marks a significant decline from 5.41 percent recorded during the same period last year, signaling a notable improvement in price stability amid subdued domestic demand and relatively stable supply conditions.

The sharp slowdown in inflation has been largely driven by falling food prices. During the review month, inflation in the food and beverage group turned slightly negative at –0.09 percent, compared to a steep 7.67 percent rise a year earlier. The reversal suggests that easing pressure on essential commodities has played a decisive role in pulling down overall inflation, offering temporary relief to households that had faced prolonged price shocks in previous years.

However, a closer look at the data reveals uneven price movements within the food category. Prices of fruits rose by 5.20 percent, while ghee and oil increased by 4.96 percent and non-alcoholic beverages by 3.04 percent. These increases were outweighed by sharp declines in pulses and legumes (–5.52 percent), spices (–3.92 percent), and other food-related items (–3.70 percent). This mixed trend reflects changing consumption patterns as well as improved availability of certain agricultural products.

While food prices softened, inflation in non-food and services remained comparatively elevated at 3.81 percent, underscoring a shift in inflationary pressure toward services and lifestyle-related costs. Significant price increases were recorded in miscellaneous goods and services (21.75 percent), education (7.56 percent), clothing and footwear (5.29 percent), tobacco products (4.15 percent), and alcoholic beverages (3.85 percent). These figures indicate that households continue to face rising expenses in essential services, even as food inflation moderates.

On an average basis, inflation during the first six months of the current fiscal year stood at 1.70 percent, well below the 4.97 percent recorded in the same period last year. This suggests that overall price pressures have remained under control so far, providing policymakers with some breathing space. However, economists caution that sustained moderation will depend on continued stability in supply chains and cautious fiscal and monetary management.

Regional data points to noticeable disparities in inflation trends. Urban inflation stood at 2.57 percent, higher than the 1.99 percent recorded in rural areas, reflecting stronger service-sector demand in cities. Among provinces, Madhesh Province recorded the highest inflation at 3.37 percent, followed closely by Koshi Province at 3.25 percent. Karnali Province posted the lowest inflation at 1.08 percent, highlighting regional differences in market access and consumption behavior.

By ecological region, inflation in the Kathmandu Valley reached 2.48 percent, while the Terai recorded 2.65 percent. Inflation in the Hill region remained relatively low at 1.94 percent, whereas the Mountain region saw a higher rate of 2.66 percent. These variations suggest that transportation costs, supply constraints, and consumption patterns continue to influence regional price dynamics.

In contrast to consumer inflation, wholesale inflation showed an upward trend. Annual wholesale inflation rose to 5.17 percent in mid-January, up from 4.01 percent a year earlier. Prices of intermediate goods surged by 7.07 percent, while consumer goods and capital goods both recorded wholesale inflation of 2.58 percent. Rising wholesale prices of construction materials, which increased by 3.48 percent, point to persistent cost pressures in the construction and infrastructure sectors.

Meanwhile, wage and salary growth accelerated sharply during the second quarter of the current fiscal year. The wage and salary index rose by 6.03 percent on an annual basis, more than double the 2.85 percent growth recorded a year earlier. Gandaki Province saw the highest wage growth at 9.71 percent, while Karnali Province recorded the lowest at 2.00 percent, reflecting uneven labor market conditions across the country.

In a regional comparison, Nepal’s inflation rate of 2.42 percent remains higher than India’s consumer inflation of 1.33 percent recorded in December 2025. Although Nepal’s inflation is currently within a manageable range, analysts warn that rising service costs, wages, and wholesale prices could gradually translate into renewed consumer price pressures if demand picks up in the coming months.

Overall, the latest inflation data presents a mixed picture. While falling food prices have helped tame headline inflation, underlying pressures in services, wages, and wholesale markets suggest that price stability remains fragile. The challenge for policymakers will be to sustain the current moderation without stifling economic recovery or allowing non-food inflation to accelerate further.