Is price surge during Ramadan inevitable?

As the holy month of Ramadan commences, it is marked by a price surge and a subsequent rise in inflation. The prices of essentials, which began their upward trend before the start of the month, have now reached a record high. This trend, observed almost every year during Ramadan, underscores a strong correlation between the month and high inflation, particularly in Bangladesh.

However, the official inflation statistics present a more nuanced picture, challenging the initial proposition. For instance, in the previous year, Ramadan spanned from the fourth week of March to the third week of April, culminating in the celebration of Eid-ul-Fitr. The monthly inflation rate in March was 9.33 per cent, which slightly declined to 9.24 per cent in April and then increased to 9.94 per cent in May. The slight drop in inflation during Ramadan, followed by Eid, presents a puzzling scenario.

Though it is visible in the market that prices have surged significantly and, in some cases, things turned volatile, the situation is not fully reflected in the official inflation rate. Take the case of two years back. The entire month of April 2022 was also the month of Ramadan. According to the Bangladesh Bureau of Statistics (BBS), the monthly inflation rate stood at 6.29 per cent, which was slightly higher than the rate of 6.22 per cent in March 2022. And inflation jumped to 7.42 per cent in May 2022. 

Consumers usually face more pressure due to an upsurge in prices of food items during Ramadan. So, one needs to look into the food inflation statistics. BBS data showed that food inflation declined modestly in April 2022, to 6.23 per cent from 6.34 per cent in March. Similarly, monthly food inflation dropped to 8.84 per cent in April last year from 9.09 per cent in March of the same year.

So, from the official statistics, it is not easy to conclude that there is a significant surge in inflation during Ramadan. One factor driving up the inflation   is that a variety of items included in the consumption basket is used to estimate the consumer price index (CPI).

The economics theory states that excessive demand against a limited supply of goods and services pushes inflation. The same thing happens during Ramadan when demand for various food items like sugar, edible oil, chickpea, onion, date, milk, etc jumped significantly. As these items carry a smaller weight in the overall food index, significant surges in the prices of these goods make a small impact on the food index as well as the rate of food inflation. [Currently, urban and rural consumption baskets cover 383 items with 749 varieties of food and non-food items (i.e. goods and services)]. This does not mean that inflationary pressure is also not there, as various sources of inflation have already existed.

The increased price of various food items is fine for the affluent section of society. Instead of considering the prices, they usually purchase what they need and want, along with some additional quantities. The number of affluent and high-income people in the country is not small, although there is no exact figure in this connection. Household Income and Expenditure Survey (HIES) 2022 revealed that 41 per cent of the national resources are kept with the country's top 10 per cent of households, whereas the ratio was 38 per cent in 2016. In other words, at least 15 million people among the population of 170 million have ownership of two-fifths of the total income. These 15 million people are a significant and robust consumer segment, and a sharp rise in the prices of essentials and other foods matters little to them. They can purchase whatever they want, no matter what the prices are. In this process, they also contribute to keeping the price level higher for the time being, leading to inflation. However, some of them also do considerable charity work during Ramadan, so they purchase a good quantity of food items to distribute among the poor and needy.

When money supply increases in the market, it also leads to inflation. The simple reason is that 'too much money is chasing too few goods', meaning aggregate demand is growing faster than aggregate supply. The net result is a rise in price level, causing demand-pull inflation. During Ramadan, the government and private employees get festival bonuses besides regular salaries. Non-resident Bangladeshis (NRBs) also try to send some extra money to their families. Banks and financial institutions encourage their clients to take consumer loans. Many Muslims also distribute their Zakat money to the poor and needy. All these increase the money supply in the market. 

Statistics available from Bangladesh Bank showed that in April of last year, money supply (M2) increased by around 2 per cent or Tk 335.31 billion over March. In May 2023, the money supply increased by around 0.40 per cent or Tk 77.82 billion. Again, in April 2022, the money supply jumped by 2.20 per cent or Tk 338.0 billion over March last year. It later dropped by Tk 10 billion in May 2022. So, it is clear that Ramadan usually witnesses a surge in money supply, a critical factor in pushing inflation.

Another factor behind the rise in prices is the illegal toll. It is an open secret that the supply chain of essential products is negatively affected by the unlawful tolls charged by rent-seekers. Some members of law-enforcing agencies, along with a section of local political leaders and activities, control the rent-seeking activities. As a result, suppliers and sellers pass the additional costs on to consumers, making inflation inevitable during Ramadan.

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