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Rising inflation in Bangladesh

| Updated: May 09, 2022 21:36:31


Rising inflation in Bangladesh

Since 2021 not only major economies around the world have been experiencing sudden and rapid surges in inflation but also developing economies like Bangladesh. By early 2022 many economists and global business leaders were wondering whether this rising inflationary trend signalled the beginning of a new inflationary era or an effect of temporary supply disruptions caused by the pandemic impacting on price levels. Now it appears inflation is likely to persist.

Inflation is not simply a rise in some prices, which merely results in a change in the relative prices of goods and services. Inflation, in fact, is a general rise in prices that results in a decline in purchasing power of money. It is not only a loss of real value in the domestic medium of exchange but also a unit of account. Under such circumstances it is well known that one group will always pay the price for inflation or bear the burden of increasing costs: working people i.e., wage earners.

The annual inflation rate in Bangladesh rose to 6.22 per cent in March this year from 6.17 per cent in the previous month. It was the highest inflation rate since October 2020. This was largely driven by prices of food items. Prices of food items rose by 6.34 per cent relative to prices of non-food items by 6.04 per cent in March. On a monthly basis consumer prices moved up 0.62 per cent in March after a 0.39 per cent rise in the previous month.

In fact, food, non-alcoholic beverages and tobacco weigh very heavily on the consumer price index (CPI)-- the principal measure of inflation in Bangladesh accounting for 59 per cent of total weight followed by gross rent, fuel and lighting accounting for 16.9 per cent. The CPI also includes clothing and footwear (6.9 per cent), transport and communication (4.2 per cent), recreation, entertainment, education and cultural services (4.1%) miscellaneous goods and services (3.6 per cent), medical and health care expenses (2.8 per cent) and furnishing (2.7 per cent). However, the recent rises in inflation have been caused by a rise in both food and non-food prices.

The South Asian Network of Economic Modelling (SANEM) disputes the official inflation figure published by the Bangladesh Bureau of Statistics (BBS). It has claimed that the inflation rate is more than double in Bangladesh than the figure published by the BBS. It is to be noted that economists in Bangladesh generally hold doubts about data published by the BBS, especially those data which have political implications such as inflation and growth rates. Politicians tend to use these data as a weapon against their opponents. 

The periods of inflationary surges in Bangladesh, therefore, tend to largely follow the trends in the movement of commodity prices in global and domestic markets, in particular rice prices. The war in Ukraine and associated sanctions are also going to contribute to rising inflation in Bangladesh as global commodity prices surge.

According to the World Bank's April Commodity Markets Outlook report, global energy prices, which have already seen a dramatic surge due to the ongoing Covid-19 lockdowns in China and the Russia-Ukraine conflict, are expected to surge by 50.5 per cent this year. The International Monetary Fund (IMF) has forecast the headline -- CPI in Bangladesh to rise by 5.9 per cent in 2022, due to higher international commodity prices.

Fuel prices in Bangladesh have also increased in response to the instability in the global energy markets. In fact, fuel prices are yet another major factor usually cited as contributing to rising domestic price levels in Bangladesh.

Also, the Bangladesh currency taka has depreciated against the US dollar in recent times impacting on the prices. Bangladesh being a food importing country, such exchange rate depreciation causes an upward pressure on import prices. In fact, such depreciation of taka relative to the US dollar also indicates that the taka is adjusting for inflation. The rise in import prices also provides another reasonable explanation for the upward movements in prices of essential food items in Bangladesh.

Furthermore, economic sanctions imposed by the United States (US) and the European Union (EU) on Russia have significantly undermined global trade in general and trade in commodities in particular. The same World Bank report further adds  that food prices are projected to increase by 22.9 per cent this year, the highest rise since 2008, as wheat prices jump 40 per cent to a record high.

The non-competitive market structure known as the "business syndicate" comprising numerous middle-men, wholesalers and importers is also another major factor in contributing to price hikes in Bangladesh. They do so by creating cartels and hoarding essential food items like rice and edible oil. Such cartels are quite powerful in Bangladesh and are capable of controlling supply in the market or fixing prices.

They also take advantage of the weak consumer protection laws in the country. Either way, they are capable of earning substantial extra profit. In fact, there were demonstrations in Dhaka last month asking the government to break up the "business syndicate" to stop market manipulation of essential goods and to introduce ration cards for the poor.

Rising food inflation is of major concern for the government  as  according to the Asian Development Bank (ADB) 20.5 per cent of population in Bangladesh live under the national poverty line as estimated in 2019. This figure now stands much higher due to the impact of the pandemic. According to a survey published at the end of the last year, it was estimated that the pandemic had pushed 32 million into poverty in the country. Inflation in urban areas rose even faster than the national average. 

Inflation is an economic phenomenon whose nuances remain a mystery even to economists. Also, forecasting inflation is especially a very tricky business, and economists, in particular, are very bad at it. Charles Goodhart, a Professor at the LSE and a former member of the Bank of England's (BOE) monetary policy committee made a remarkable statement  in a recent ECB get-together that "the world at the moment is in a really rather extraordinary state because we have no general theory of inflation". The statement encapsulates the core of the problem for central banks including Bangladesh Bank to deal with inflation effectively.

Goodhart argues that the two competing theories-- the Friedman's monetary theory and the Philips Curve theory that dominated the debate on inflation in the 1950 through the 1970s have broken down empirically over the last three decades. The replacement adopted by central banks in the developed world, Goodhart describes, as a "bootstrap theory of inflation": that is if people expect high inflation, they will behave in ways that reinforce inflation and vice versa. In other words, as long as inflation expectation remains anchored, inflation itself will remain anchored. He considers inflation expectations as very backward looking and people tend to extrapolate their recent experience into the future.

So, if workers expect high inflation, they will demand higher wages to keep their purchasing power unchanged. In the similar way, businesses will pass on cost increases to their customers in the form of higher prices. And if consumers expect high inflation, they will be amenable to paying higher prices. This is what now forms the perspective of central banks around the world with regard to inflation as Goodhart alluded to.

If wages rise in line with inflation, the purchasing power will remain unchanged, but not all workers have sufficient leverage to obtain wage increases in line with inflation. The bargaining power of workers has been eroded by very low levels of unionism in most countries around the world. For decades this leverage has been entirely onesided, with working people having very little ability to protect wages against rising prices.

Therefore, inflation generally results in income redistribution from labour to capital because capital's preferred solution to inflation is always to take the cost of inflation from labour's side of the ledger. Prices have hugely outpaced costs during the pandemic in countries around the world causing large shifts from wages to profits. In the US, the profit share of corporate income is rising by more than two percentage points since the pandemic began.

As the current inflation debate continues, it is important to note that there is a general consensus that while there are evidences to support linking inflation to macroeconomic overheating, the Covid-19 pandemic is the primary factor driving high inflation through demand and supply side distortions. Therefore, the rise in inflation in Bangladesh like in most other countries around the world is overwhelmingly the result of problems associated with reopening the economy, now further exacerbated by the Russia-Ukraine conflict.

The key issue for the government Bangladesh now is to consider whether inflation has peaked or will it continue to rise. Either way at what pace it will have to decline needs to be worked out and within what timeframe. While controlling inflation is one of the main tasks of Bangladesh Bank, moderate interest rate hikes will not slow inflation by themselves but will also require to tighten other aspects of monetary policy. It is also to be noted that there is no simple and painless way to bring down the inflation rate through interest rate hikes by banks. 

The benefits of these policy actions in convincing households and businesses that inflation has been taken seriously by policy makers also need to be weighed against their possible downsides in slowing economic growth, i.e., recession leading to increased unemployment. Meanwhile, the government also needs to demonstrate that it is committed to a fully functioning competitive market economy by breaking up the "business syndicate" and enacting and enforcing laws to safeguard consumer interests and anti-competitive behaviour.

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