Inflation across the world is spreading to a good number of goods and services. That's why International Monetary Fund (IMF), in its latest World Economic Outlook (WEO) last week, cautioned that higher inflation would likely continue in the coming months before returning to pre-pandemic levels by mid-2022. The IMF says: "In most cases, rising inflation reflects pandemic-related supply-demand mismatches and higher commodity prices compared to their low base from a year ago." The fund also said that in some emerging markets and developing economies, pressures of price may persist due to higher food prices coupled with lagged effects of higher oil prices. In some countries, exchange rate depreciation is also lifting the prices of imported goods. IMF projects that the annual inflation rate in emerging and developing nations will reach 5.50 per cent by the end of this year which was 5.10 per cent in the last year.
IMF also provides country-wise projections regarding inflation. For Bangladesh, IMF projected that the annual average inflation rate may stand at 5.70 per cent in the current fiscal year (FY22) against the country's government target of 5.30 per cent. IMF also projected that inflation at the end of the fiscal year would be 5.80 per cent which is the monthly rate. In the last fiscal year, the annual average inflation rate stood at 5.56 per cent against the annual target of 5.40 per cent in terms of the consumer price index (CPI). Over the last couple of years, the annual rate of inflation has hovered below 6.0 per cent in the country.
By having the inflation rate below 6.0 per cent, the policymakers are in their comfort zone regarding the price situation. The official inflation rate, however, does not always reflect the reality mainly due to the distribution of weights in the CPI. The current price situation may be an example in this connection. Prices of essentials have been rising gradually for the last couple of months. Nevertheless, inflation in July declined to 5.36 per cent from 5.64 per cent in June this year. As the price situation aggravated further, the inflation rate increased to 5.54 per cent in August. The official figure inflation in September is yet to be released. On an annual average basis, the rate of inflation was slightly above 5.50 per cent in the first two months --July and August-- of the current fiscal year.
It is not clear whether the rising trend of inflation is a matter of concern for the monetary authority of the country, Bangladesh Bank to be specific. The central bank is yet to take any steps so far to curb the inflationary pressure. There is no rate hike when the money supply has increased significantly and pulled down the interest rates. The average deposit rate in the banks came down below 4.50 per cent already and if the current trend continues, it is likely to fall below 4.0 per cent. The average deposit rate is well below the average rate of inflation which indicates that that purchasing power of fixed-earning people has eroded significantly and their real income becomes negative.
Bangladesh Bank cut down the repo and reverse repo rates to 4.75 and 4.00 per cent respectively in July last year as a part of easy monetary policy. "Following easy monetary policy, the interbank call money rate showed a declining trend since September 2020. Consequently, the weighted average call money rate in the inter-bank money market is now hovering below the Repo and Reverse Repo corridor at 1.85 per cent up to September 26th of FY22; which indicates sufficient liquidity in the money market," said the latest monthly report of the central bank on major economic indicators.
The continuation of easy money policy to support the pandemic affected sectors and businesses and also to back the recovery of economic growth now requires a review when inflation is hurting people much. Moreover, depreciation of local currency or taka against the US dollar has made the imports costlier although exports recipients and remittance earners are getting more in local currencies. Taka-dollar exchange rate on average increased to Tk 85.20 in August from Tk 84.80 in July per dollar. It further increased to Tk 85.60 in the second week of October. The 'partially managed' floating exchange rate mechanism, however, provides the central bank with an opportunity to intervene in the foreign exchange market from time to time.
The central bank is apparently facing a difficult choice to maintain a reasonable balance between inflation and growth. The easy monetary policy helped to push aggregate demand and spur consumer spending. At the same time, inflationary pressure is increasing due to a mix of growing demand and rising costs. A rate hike may be instrumental to ease the inflationary pressure to some extent in the near future. Already yields of treasury bills and bonds have started to increase in the money market.
The other factors like additional cost in the supply chain need some administrative steps to contain the rising trend of inflation, especially food inflation. The official figure, released by the Bangladesh Bureau of Statistics (BBS) showed that food inflation rise modestly to 5.16 per cent in August from 5.08 per cent in July. Non-food inflation, however, surged sharply to 6.13 per cent in August from 5.80 per cent in July this year. We are to wait for the release of the BBS data to see what the September inflation figure would come to.
Notwithstanding the official figure, prices of essentials and food items have been on the rise. Long queues of the low-income people for purchasing rice and food items from the TCB trucks are growing every day. The government earlier reduced the import duty of rice to 25 per cent from 62.50 per cent. But it had little impact on the rice market. Now it has reduced duty on the import of onion and sugar. By reducing the duties, the government has acknowledged the problem of persistent rise in price. Measures in other areas, for example, a hike in rate by the central bank are also required to be taken to reflect the government's acknowledgement of the situation.