Nepal’s Inflation Shows Mixed Pattern as Food Prices Ease but Services and Non-Food Costs Remain Elevated

Kathmandu, October 2025 | NepseTrading Desk

Nepal’s consumer price inflation for mid-September (Bhadau 2082/83) presents a nuanced picture of the country’s cost of living dynamics. The National Consumer Price Index (NCPI), published by the Nepal Rastra Bank, reveals that inflationary pressures persist in the non-food and services sector even as food prices begin to stabilize after several months of volatility. The index rose to 105.74 points, reflecting a 1.87% annual increase compared to the same month last year, and a 0.74% rise month-on-month compared to mid-August (Saun 2082/83). While the increase is moderate compared to historic inflation peaks, the underlying structure shows that prices of essential services and non-food commodities are becoming the primary drivers of inflation in Nepal.

Moderate but Uneven Growth Across Categories

The overall NCPI averaged 105.74 in mid-September 2025, up from 103.80 in the same period of the previous year, showing an inflationary growth of nearly 1.9%. On a sequential basis, the increase of 0.7% over the previous month suggests that inflationary pressures remain active despite easing food prices. The Food and Beverages group, which carries a weight of 35.49% in the national basket, stood at 104.90, whereas the Non-Food and Services category, with a dominant 64.51% share, recorded 106.21 points. This composition highlights a structural imbalance where service-sector and urban consumption items are maintaining steady inflation momentum even when rural food prices temporarily stabilize.

The pattern of inflation is not uniform. While many essential commodities like cereals, pulses, and dairy show only mild increases or marginal declines, certain service-oriented sectors such as education, health, housing, and personal services are experiencing stronger and more persistent price rises. This suggests that inflation in Nepal has moved beyond short-term food supply fluctuations to more entrenched cost increases linked to urbanization, imported goods, and service-sector price rigidity.

Food Inflation: Supply Stabilization and Seasonal Correction

Within the Food and Beverages group, price changes display significant variation. Cereal grains and products, representing 8.08% of the total weight, recorded an index of 104.41, up 6.5% from last year. This rise stems largely from a combination of elevated global cereal prices, higher transportation costs, and delays in domestic procurement. However, the rate of increase is slower than the double-digit growth seen a year earlier, suggesting gradual stabilization in staple prices.

Pulses and legumes, a key protein source for Nepali households, registered a 10.8% annual rise, the highest among major food items. Analysts attribute this to weaker domestic yields and increased dependency on imports from India, where prices have also risen due to lower rainfall and production disruptions. Vegetable prices, on the other hand, fell sharply by 12.7% year-on-year, marking a significant reversal after last year’s surge. This drop reflects seasonal abundance, improved supply logistics, and stable fuel prices that helped reduce distribution costs during the monsoon harvest period.

In contrast, milk products and eggs saw a moderate increase of 2.7%, reflecting ongoing cost adjustments in dairy farming and feed prices. Ghee and oil prices surged 11.1% month-on-month, driven by international edible oil markets and the festival season’s demand pressure. Fruit prices dipped slightly (-1.1%), while spices declined by 6.3%, marking continued relief in household cooking expenses. Sugar and sugar products rose marginally by 0.9%, consistent with global sugar trends, and non-alcoholic beverages increased by 3.9%, following higher packaging and distribution costs.

Collectively, the data show that food inflation in Nepal is entering a correction phase, with improved supply and stable import channels helping to offset earlier spikes. However, the risk of renewed price pressure remains if external factors — particularly oil prices, currency depreciation, or Indian export restrictions — resurface in the coming months.

Non-Food and Services: The Silent Driver of Persistent Inflation

While food prices are stabilizing, the non-food and services category, which makes up nearly two-thirds of the NCPI, continues to be the main source of inflation persistence. This group increased by 3.7% year-on-year, reaching 106.21 points, compared to 102.42 last year. Sub-groups such as education, miscellaneous services, housing, transportation, and clothing are leading this sustained upward trend.

Education costs rose by a striking 7.67% compared to last year, reflecting higher tuition fees in private schools and universities. As the education sector continues to privatize and urbanize, families face mounting expenses, which significantly affect middle-income and lower-middle-income households. Similarly, miscellaneous goods and services, which include personal care, household maintenance, and social services, soared by 11.77% year-on-year, the highest among all non-food categories. This indicates expanding costs in the urban service economy and rising household expenditures unrelated to food.

The housing and utilities subgroup recorded a 1% annual increase, indicating stable rent levels but rising maintenance and fuel costs. Furnishing and household equipment rose by 4.55%, while health services increased by 2.98%, both driven by import prices for medical and household products. The transportation index climbed 2.56%, in line with sustained fuel costs and minor adjustments in domestic transport fares. Clothes and footwear saw a significant increase of 6.29%, reflecting higher import duties and rising production costs in India and China. Restaurants and accommodation services rose by 3.88%, showing cost-push inflation in hospitality driven by energy, labor, and raw material costs.

Meanwhile, communication services and insurance/financial services remained largely stable, with only minimal changes, indicating strong price controls in regulated sectors. The tobacco and alcoholic drinks categories, though smaller in weight, recorded moderate increases due to excise duties and demand recovery following pandemic-era restrictions.

Interpreting the Inflation Dynamics: Transition from Food to Structural Inflation

The overall trend suggests that Nepal’s inflation is evolving from a short-term, food-based phenomenon into a broader, structural one. Historically, Nepal’s inflation has been highly correlated with agricultural production cycles and Indian import prices. However, the current pattern — where non-food items and services exhibit steady and widespread increases — points toward a deeper, more persistent form of inflation. This structural inflation is typically more difficult to control through monetary policy alone, as it stems from wage adjustments, administrative pricing, and urban cost structures rather than short-term supply shocks.

Furthermore, imported inflation remains a significant concern. The depreciation of the Nepali rupee, coupled with dependence on India for essential goods, has amplified the cost of imports ranging from fuel to finished consumer products. With the Indian inflation rate hovering above 5%, Nepal’s parallel trade exposure naturally transmits price pressures across borders. Rising freight and logistics costs also contribute to maintaining higher retail prices despite moderate domestic demand.

Economic Outlook and Policy Implications

From a macroeconomic standpoint, Nepal’s inflation outlook for the current fiscal year (2082/83) remains cautiously moderate but vulnerable. The average inflation rate of around 1.87% in Bhadau may appear mild, yet it masks the divergence between easing food prices and persistent service inflation. As the festive season approaches — traditionally a period of elevated consumer spending — temporary price surges in food, clothing, and hospitality are expected.

For the Nepal Rastra Bank (NRB), this presents a delicate policy challenge. The central bank must balance the need to maintain price stability with credit expansion to support economic growth. Tightening monetary conditions further could suppress investment and consumption, while a looser policy might risk reigniting inflationary expectations. Analysts suggest that NRB will likely maintain a neutral to slightly restrictive stance, emphasizing liquidity control while allowing targeted credit to productive and export-oriented sectors.

At the same time, fiscal policy coordination will be essential. The government’s efforts to reduce supply bottlenecks, improve storage and transport infrastructure, and stabilize import channels could play a crucial role in mitigating inflation volatility. Without such structural reforms, even moderate inflation could erode purchasing power, especially for fixed-income earners and rural households.

Inflation Eases but Risks Remain

In conclusion, Nepal’s latest NCPI data underscores a transitional phase in the nation’s inflation trajectory. The good news is that food prices are normalizing, helping to relieve short-term cost pressures for consumers. However, non-food inflation, particularly in services, education, and housing, is emerging as the new inflation frontier — less visible but more enduring. The persistence of such inflation indicates that Nepal’s economy is moving toward an urban cost-driven inflation structure, similar to more developed economies, but without the wage and productivity growth to offset it.

If external shocks such as global oil price hikes, Indian export restrictions, or currency depreciation occur, the inflation trend could reverse quickly. Therefore, continuous monitoring, efficient import management, and stronger domestic production incentives remain essential to preserving price stability in the coming quarters.