What is Inflation?

Inflation is a sustained increase in the average price of all goods and services produced in an economy. Money loses purchasing power during inflationary periods since each unit of currency buys progressively fewer goods. In economics, inflation is a rise in the general level of prices of goods and services in an economy over a period of time. When the general price level rises, each unit of currency buys fewer goods and services. Consequently, inflation also reflects erosion in the purchasing power of money a loss of real value in the internal medium of exchange and unit of account in the economy. A chief measure of price inflation is the inflation rate, the annualized percentage change in a general price index (normally the Consumer Price Index) over time. Suppose the overall price level increased by 3% during the past 12 months. If a "typical urban household" spent Tk.3, 000.00 during the first month for all household expenses, then they must budget Tk.3, 090.00 during the last month for exactly the same quantity of goods and services. Prices of individual items may have increased at different rates and some prices may have even declined, but overall they must budget about Tk.90 more per month now. If their income after taxes does not increase by that amount, they must save less, substitute less expensive items, forgo some items, or incur debt.

Inflation Impact on Economy

Inflation effects the different sectors of the economy (Effects on the distribution of income and wealth, Effects on production, Effects on the Government, Effects on the Balance of Payment, Effects on Monetary Policy, Effects on Social Sector, Effects on Political environment) and different classes of the people (Debtors & Creditors, Salaried Class, Wages earners, Fixed income group, Investors and shareholders, Businessmen, Agriculturists). An 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). For example if one takes a loan where the stated interest rate is 6% and the inflation rate is at 3%, the real interest rate that one are paying for the loan is 3%. It would also hold true that if one had a loan at a fixed interest rate of 6% and the inflation rate jumped to 20% one would have a real interest rate of -14%. Inflation's effects on an economy are various and can be simultaneously positive and negative. Negative effects of inflation include a decrease in the real value of money and other monetary items over time, uncertainty over future inflation may discourage investment and savings, and high inflation may lead to shortages of goods if consumers begin hoarding out of concern that prices will increase in the future. Positive effects include ensuring central banks can adjust nominal interest rates (intended to mitigate recessions), and encouraging investment in non-monetary capital projects. Inflation affects the rich and the poor and it poses a threat to the economy. Now the question is how does inflation affect an economy of a nation? If you check global market history, you would understand that each and every country has undergone inflation at any one point of time. For instance, after the World War I, the German government lowered the value of their currency by printing massive amount of notes. And to buy a loaf of bread one had to spend a huge amount. The present downward trends in the world economies have resulted in credit crunch and financial crisis. These situations have invoked the curiosity of many about why does inflation occur?

Inflation always hurts ones' standard of living. Rising prices mean people have to pay more for the same goods and services. If income increases at a slower rate as inflation, the standard of living declines even if one makes more. So it is the root cause in making and affecting economy and people of the country poor. If we want to control inflation we shall have to inflict strict control over the supply of money and evading any relaxation to the supply of money. This is the most apt way whereby we can control inflation effectively and keep the economy of the country in a strong and stable position. At the time of inflation, financial planning becomes difficult. The reason - the value of money decreases with inflation. It would affect the pensioners more than the ones who are currently employed. In an inflation-affected economy, retirement planning is nearly impossible because the premium you pay would have to be high if you want to keep the same quality of life. People tend to save less in an economy affected by inflation because the price of services and goods are ever time high and there is nothing or very less leftover income available to save. However, economists opine, many of the issues stemming from inflation are caused by the widespread consumer panic and fear and not by the market alone. Economists generally agree that high rates of inflation and hyperinflation are caused by an excessive growth of the money supply. Views on which factors determine low to moderate rates of inflation are more varied. Low or moderate inflation may be attributed to fluctuations in real demand for goods and services, or changes in available supplies such as during scarcities, as well as to growth in the money supply. However, the consensus view is that a long sustained period of inflation is caused by money supply growing faster than the rate of economic growth.

Present Inflation rate in Bangladesh

*The rate of Inflation has remained stubbornly high after the latest official Statistics put the point-to-point inflation at 11.97% in September 2011. The rate has maintained its upward trends as the inflation was 11.29% in August 2011, according to Bangladesh Bureau of Statistics. In September 2011, the food inflation also went up to 13.75%, which was 12.70% in August 2011. At 8.77%, the non-food inflation was however a bit static in September 2011, which was 8.76% in August 2011. The overall inflation rate has continued upward trend in the last few months due mainly to food price increases. Officials of the central bank however said the inflation could ease in the coming months riding on a stable rice price. (*Source : The daily Star, 17 October 2011)

Year 1991 1992 1993 1994 1995 1996

Inflation rate(%) 8 3.8 3 3.5 8.8 7

Year 1997 1998 1999 2000 2001 2002

Inflation rate(%) 2.6 7.0 9.0 9.0 5.8 5.8

Year 2003 2004 2005 2006 2007 2008

Inflation rate (%) 3.1 5.6 6.0 7.0 7.2 9.1

Year 2009 2010 2011

Inflation rate (%) 8.9 8.1 11.97

Table : Lists of Inflation Rate from 1991-2011 in Bangladesh

Date Source: (1) CIA World Factbook. (2) Bangladesh Bank. (3) Bangladesh Bureau of Statistics.