INFLATION: BANGLADESH PERSPECTIVE

Introduction:
People like to complain about prices going up, but they often ignore the fact that wages should
be rising as well. The question shouldn't be whether inflation is rising, but whether it's rising at a
quicker pace than your wages.
Inflation is an economic term that is used to describe the general increase in the prices of
commodity and services in an economy over a certain period of time. It is described as an index
because the current prices of commodities are compared to a standard prices level. Bangladesh
has been facing an upward trend in inflation over the last couple of years.
Inflation expands the wealth of the asset owners while it reduces the net consumption of the poor
as the prices of goods and services go up. If a poor wants to maintain the same level of food
consumption, it reduces his or her other consumption, including health, education and
investment. Such increments in price without corresponding rise in disposable income restrain
the governments goal of reduction of poverty.
When inflation surged to double-digit levels in the mid- to late-1970s, Americans declared it
public enemy No.1. Since then, public anxiety has abated along with inflation, but people remain
fearful of inflation, even at the minimal levels weve seen over the past few years. Although its
common knowledge that prices go up over time, the general population doesnt understand the
forces behind inflation.

Definition of Inflation:
Inflation is defined as a sustained increase in the general level of prices for goods and services. It
is measured as an annual percentage increase. As inflation rises, every dollar you own buys a
smaller percentage of a good or service.
The value of a dollar does not stay constant when there is inflation. The value of a dollar is
observed in terms of purchasing power, which is the real, tangible goods that money can buy.
When inflation goes up, there is a decline in the purchasing power of money. For example, if the
inflation rate is 2% annually, then theoretically a $1 pack of gum will cost $1.02 in a year. After
inflation, your dollar can't buy the same goods it could beforehand.
There are several variations on inflation:
Deflation is when the general level of prices is falling. This is the opposite of inflation.
Hyperinflation is unusually rapid inflation. In extreme cases, this can lead to the
breakdown of a nation's monetary system. One of the most notable examples of
hyperinflation occurred in Germany in 1923, when prices rose 2,500% in one month!
Stagflation is the combination of high unemployment and economic stagnation with
inflation. This happened in industrialized countries during the 1970s, when a bad
economy was combined with OPEC raising oil prices.

Causes of Inflation:
Economists wake up in the morning hoping for a chance to debate the causes of inflation as it has
a great effect on economy. There is no one cause thats universally agreed upon, but at least two
theories are generally accepted:
Demand-Pull Inflation This theory can be summarized as too much money chasing
too few goods. In other words, if demand is growing faster than supply, prices will
increase. This usually occurs in growing economies.
Cost-Push Inflation When companies costs go up, they need to increase prices to
maintain their profit margins. Increased costs can include things such as wages, taxes, or
increased costs of imports.

Cost of Inflation:
Menu Costs: In economics, a menu cost is the cost to a firm resulting from changing its
prices. With high inflation, firms must change their prices often in order to keep up with
economy-wide changes, and this can be a costly activity, as with the need to print new
menus, and as with the extra time and effort needed to change prices constantly.
Shoe-leather Costs: Shoe-leather cost refers to the cost of time and effort that people
spend trying to counteract the effects of inflation. The term comes from the fact that more
walking is required to go to the bank and get cash and spend it, thus wearing out shoes
more quickly.
 Reduction of Purchasing Power: By definition, inflation causes the value of an
individual dollar to decrease over time. Purchasing power can be maintained if wages
increase exactly at the rate of inflation, but this is not always the case. When wages
increase less than the rate of inflation, people lose purchasing power.
Redistribution of Wealth: The effect of inflation is not distributed evenly in the
economy, and as a consequence there are hidden costs to some and benefits to others
from this decrease in the purchasing power of money. For example, with inflation, those
segments in society which own physical assets (e.g. property or stocks) benefit from the
price of their holdings going up, while those who seek to acquire them will need to pay
more for them.

Effects of Inflation:
Inflation has a negative impact on economy, general level of price increases, purchasing power
of currency decreases. The main effects are described below -
General effect: Increase in the general level of prices implies a decrease in the
purchasing power of the currency. That is, when the general level of prices rises, each
monetary unit buys fewer goods and services. Increases in the price level (inflation) erode
the real value of money (the functional currency) and other items with an underlying
monetary nature (e.g. loans and bonds).
Negative effect: High or unpredictable inflation rates are regarded as harmful to an
overall economy. Inflation can act as a drag on productivity as companies are forced to
shift resources away from products and services in order to focus on profit and losses
from currency inflation. In case of international trade, Higher inflation in one economy
than another will cause the first economy's exports to become more expensive and affect
the balance of trade
Positive effect: Positive effects include ensuring central banks can adjust nominal
interest rates (intended to mitigate recessions), and encouraging investment in non-
monetary capital projects. It puts impact on Labor-market adjustments, Room to
maneuver, Mundell-Tobin effect, Instability with Deflation etc.
Bangladesh Inflation Rate:

Consumer prices in Bangladesh increased 6.05 percent year-on-year in November, following a

6.19 percent growth in the previous month. It was the lowest reading since January, as food
inflation slowed to 5.72 percent (+5.89 percent in October) and non-food inflation to 6.56
percent (+6.67 percent in October). Inflation Rate in Bangladesh averaged 6.62 percent
from 1994 until 2015, reaching an all time high of 12.71 percent in December of 1998 and
a record low of -0.02 percent in December of 1996.

Rate of Inflation
November, 2015 October, 2015 November, 2014
(as measured by CPI, base 2005-06)
Point to point 6.05% 6.19% 6.21%
Monthly Average(Twelve Month) 6.20% 6.21% 7.10%

A figure showing the inflation rate of Bangladesh throughout the year 2015.

Applicable strategies to cope with Inflation

The policy makers have to keep a sharp eye on cost behavior in the relevant periods.

Bangladesh Bank can take over some responsibilities.

 Increases supply of essential commodities (rice, wheat, and lentil) with no or least tariff
and efficient intermediation.

Cutting down indirect tax on commodities may help to reduce inflation pressures
temporarily.

Information system should be improved in a way that reduced the information gap among
different stakeholders of the country.

Government can effectively use its legal power to break up the market syndication and
thus improve competitiveness of the distribution network.

Bangladesh Bank can reduce the duration of loan given against L/C opened for importing
essential consumer gods.

To strengthen local currency Government has to increase Remittance Inflow, Export &
Production.

To strengthen the Trading Corporation of Bangladesh to control import prices of essential

commodities.

Government should pass Consumer Rights Protection than consumers will be able to
seek legal protection against charging of irrational price of essentials by the sellers.

Conclusion:

Inflation was there always and it will be but the fact is the inflation should be controlled it should
be kept in a limit. The government of Bangladesh should take necessary steps to keep it under
control. Between the two mitigation techniques Bangladesh Government should keep its eye on
the underlying reasons behind inflation. Bangladesh can mitigate the rising food price if
Government can take necessary steps in increasing the production of food grains in Bangladesh.
Bangladesh Govt. also has to increase employment facility by increasing the number of
investment in production sector. If more industrialization can be occurred then the GDP will
increase and the inflation will be mitigated. Bangladesh bank and also use the monetary weapons
that they have over inflation. So, controlling of inflation for short term is not what our country
needs to emphasize rather the long-term solution is needed.