The Financial Express

Inflation risk concerning

Inflation risk concerning

Even after passing through a series of restrictions or lockdowns to contain the infection, the inflation situation in the country had not aggravated too much in the last fiscal year (FY21). Looking at the official statistics of price inflation, one would agree with the statement.  The annual average rate of inflation, calculated using the Consumer Price Index (CPI), stood at 5.56 per cent in the last fiscal year against 5.65 per cent in FY20. On a point-to-point basis, the rate of inflation came down to 5.64 per cent in June of the past fiscal year, from 6.02 per cent in June last. The finance minister, in his budget speech in June this year, argued: "Overall inflation, including the price level of essentials, also remained stable."

Inflation actually measures how much more expensive a set of goods and services has become over a certain period, usually a month or a year.

The inflation rate refers to the rate of change in the prices of goods and services. Different goods' prices, however, change at different rates. So, the inflation rate depends on how the statistical agency averages the prices of all of the goods and services in an economy. In Bangladesh and many other countries in the world, it is the CPI widely used to estimate inflation officially.

Whatever the official statistics revealed, it may sometimes be difficult to comprehend without going deep into the relevant data. The monthly trend of price inflation is a better indicator to understand the more realistic pattern of price situation in a country as inflation is the rate of increase in prices over a given period of time.

The monthly trend of inflation in the last year showed that the rate of inflation reached its highest level of 6.44 per cent in October last and then started to come down. In January this year, it came down to 5.02 per cent. It then again started to rise and finally ended at 5.64 per cent in June.  Thus, inflation in the last fiscal year fluctuated although stayed above the annual average target of 5.40 per cent in most of the months. 

Higher inflation means much erosion of real income as well as the purchasing power of most of the consumers. That's why government and central banks try to check the rise of inflation. When an economy grows at a faster rate, as reflected in the growth rate of Gross Domestic Product (GDP), it also fuels inflation.  To make a balance between growth and inflation, the central bank tries to contain or curb the money supply in the market.

Having excess or additional money in hand, consumers may tempt to spend for purchasing goods. As production and supply of goods are not always matched with the increasing demand within a short period of time, it pushes up the prices of limited goods. Thus, inflation increases and makes many things costlier. Applying monetary tools like rate hikes, central bank steps in to divert excess money from the market to banks. The process reduced the money supply and reduced the purchasing ability of consumers. So, aggregate demand declined and inflation also comes down.

The vast complexity of the real-world, however, makes it difficult to implement the formula of the money supply. So, central banks' move to contain inflation doesn't bring optimal results all the time. In some cases, it works nicely. Again, in many cases, it doesn't work well. Nevertheless, the role of the central bank in inflation management is always critical.

During the pandemic, central banks across the world, however, have to focus less on inflation to spur economic growth by providing monetary support to regain aggregate demands. In Bangladesh, the central bank relaxed the policy rates providing spaces for the banks to cut the lending rates and disburse more credit to different sectors. There were other measures like refinancing and working capital injection. All these expansionary measures were needed to help the agriculture, industrial and services sectors to continue business activities in the last fiscal year. The result is mixed due to several factors like some misuse of funds, lack of coordination and lag-effect of monetary policy transmission. Two broad outcomes are visible. There is finally lower than initially expected economic growth. GDP growth rate stood at 5.47 per cent in FY21, as per provisional estimate, against 3.51 per cent in FY20. Despite losses in output in different sectors, significant revival of others  helped to record economic growth. Another is a rise in inflation due to expansionary monetary policy. Increased money supply in the market partially contributed to fuel inflation.

The macroeconomic phenomenon largely aligns with the global trend. International Monetary Fund (IMF) Economic Counsellor Gita Gopinath at the Bruegel Annual Meetings 2021 said: "Unprecedented joint monetary-fiscal support in response to the pandemic has crucially helped limit output losses but triggered inflation and debt concerns." She also mentioned that inflationary pressure has transitory features, but with upside risks.

Regarding the current global trend of inflation, Trade and Development Report 2021, released by the United Nations Conference on Trade and Development (UNCTAD) said: "The initial economic impact of Covid-19 was the deep recession and lower inflation. However, since the second half of 2020, due to a combination of the quick recovery of global aggregate demand and some adverse supply shocks, prices have been accelerating in the world's advanced economies. Globally, the rise in commodity prices has pushed the cost of basic inputs higher. ..The increase in food prices has contributed to the rise in the world hunger index since the pandemic, with the greatest harm in developing countries."

Despite being a global phenomenon, the local factors of inflation in Bangladesh also need to be taken care of. Moreover, the pandemic-induced inflationary pressure took some tolls on limited income people. A policy note, prepared by Bangladesh Bank, found that there was a significant impact of Covid-19 on the 'inflation rate of Bangladesh in terms of increasing volatility which differs in rural and urban areas…. the fluctuations in food inflation are greater than those of non-food inflation.' It also mentioned that the non-food component of CPI showed 'higher inflation in the transport and communication, and medical care and health expenses and lower inflation of clothing and footwear, and gross rent, fuel and lighting.'

Thus, there is little to be comfortable about the inflation situation. Bangladesh has now entered the so-called 'low-growth, high inflation territory. Fixed and low-income people have already borne the brunt of inflation. Although the inflation rate came down to 5.36 per cent in July, it is a temporary relief. Some indications are there that inflation may rise again in the near future. Beside the prudent use of monetary policy tools, more income-generating activities are needed now.

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