Inflation as measured by the consumer price index averaged 9.5% year on year in the first seven months of 2010/11. This exceeds by a significant margin the 7% target set by the then finance minister, Surendra Pandey, in his budget presentation in November 2010, but it represents some progress compared with the double-digit inflation rates recorded in 2008/09. Given high inflation in India, as well as the political uncertainty in Nepal, a 7% average inflation target for 2010/11 seems an unrealistic aspiration. We expect inflation to remain elevated, albeit below its 2009 average of 11.6%. The rate of inflation is estimated to have averaged 10.4% in 2010, and we forecast that it will moderate further in 2011-12, to an annual average of 6.8%.