American Journal of Economics 2018, 8(5): 209-212 DOI: 10.5923/j.economics.20180805.01 Analysis of the Determinants of Inflation in Nepal Sunil Kumar Chaudhary * , Li Xiumin School of Economics, Northeast Normal University, Changchun, China Abstract This study examines the impacts of macroeconomic variables on the inflation in Nepal during 1975-2016. The variables considered for the study is limited to the use of broad money supply, real GDP, Indian prices. The results suggest that all variables considered are significant in long run implying that these variables are the determinants of inflation in Nepal. The results are consistent with monetary theory. The money supply and Indian prices cause inflation in the long-run based on an Ordinary Least Squares regression model. Keywords Inflation, Consumer Price Index, Money Supply M2, Real GDP, Nepal 1. Introduction The price level and its growth, inflation, is an important economic indicator. Inflation can be defined as the persistent rise in the general price level across the economy over time. Inflation is an increase in the volume of money and credit relative to available goods resulting in a substantial and continuing rise in the general price level (Webster’s New Collegiate Dictionary, 1973ed.). More precisely, inflation is a substantial and continuing increase in the volume of money and credit relative to available goods, resulting in a substantial and continuing rise in the general price level. There is an important distinction between this definition and a popular misconception that results from our attempts to measure the general price level. There are various indices which measure the price level, such as; consumer price index (CPI): wholesale price index (WPI); sensitive price index (SPI); gross domestic product (GDP) deflator and so on. In Nepal, there are three main price indices, namely: the CPI; the WPI; and the Salary and Wage Rate Index (SWRI). The main focus for measuring the cost of living is placed on CPI. This is because CPI measures inflation impact which is the final measure of prices on households. Through this procedure, we tend to think of inflation as an increase in the price indexes so that any increase in an index is labelled “inflation”. A continuous rise in price level is termed as inflation (Parkin & Bade, 2001). Inflation is an ongoing process whereby prices are rising persistently year after year. Shapiro (2010) defines inflation as a rising price level. If such a rise in price level persist for long it is known as * Corresponding author: sunilcitd@gmail.com (Sunil Kumar Chaudhary) Published online at http://journal.sapub.org/economics Copyright © 2018 The Author(s). Published by Scientific & Academic Publishing This work is licensed under the Creative Commons Attribution International License (CC BY). http://creativecommons.org/licenses/by/4.0/ inflation. Consumer price index, gross domestic product deflator and other several indices measure the changes in price level. The use of these measures is purposely applied wherever appropriate. However, the rate of percentage change in consumer price index as a measure of inflation is widely used. We also here adopt this definition of inflation for our purpose. Inflation is everywhere and is interestingly touchy issue in macroeconomics. All daily newspapers cover the news about inflation. There is no dearth of literature on inflation. It is the mostly discussed issue all over the world among policy makers and academia. It is because of the fact that its effects are widespread and severe and the impacts are far reaching. Inflation has been the major concern for the government since it has serious implication for the living of common peoples. Moreover, it affects several macroeconomic variables such as saving, investment, real interest, real wage, real income and level of employment. Inflation depreciates domestic currency and the imports become more expensive which further push up the domestic prices. In short, inflation is a burning issue in the macroeconomics and main objective and function of central bank is to control inflation. Table 1 shows that price index (base year 2010) has increased persistently over the years. It has increased by little over twenty-five times (from 6.4 to 165.9) during 1975-2016. This means the purchasing power of the Nepalese rupee has decreased by the same speed. The impact of rising prices on the real sector is stylized fact. It constrains the rise of per capita real GDP and thereby reduces the standard of livings of the common people in the country. The stationary price level has thus been one of success parameters of the government. However, it has been a Herculean task to achieve in developing countries. In case of Nepal, however, there appear some positive signals in slowing down the speed of price rise in the later years. For instance, CPI took nine years to double from 6.4 in 1975 to 12.5 in 1984; it doubled even faster within six years between 1985 and 1991 and it took eight-year period between 1991 to 1999. This has,