In recent months, inflation has become a widespread phenomenon on a global scale, primarily driven by the impact of escalating food and fuel prices, particularly in emerging economies. The country’s overall point-to-point inflation rate, indicative of stability in food prices, experienced a slight alleviation to 9.41% in December of the previous year, as reported by the Bangladesh Bureau of Statistics (BBS). In November, the average inflation rate stood at 9.49%. Providing a welcome respite for lower-income individuals grappling with soaring prices of daily necessities, the food inflation rate dropped below 10% in the concluding month of 2023. It decreased to 9.58% in December, down from 10.76% in November, after reaching a decade-high of 12.56% in October.
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The rise in consumer purchasing power has contributed to an escalation in the inflation rate. In November of the past year, the minimum wage for readymade garment (RMG) workers was established at Tk12,500, surpassing the previous minimum wage of Tk8,000 set in 2018 by over 50%. This significant increase in the purchasing power of the largest workforce in the country could potentially be a factor contributing to the elevated inflation rate.
World’s biggest financial problem
Inflation has emerged as the paramount financial concern and challenge globally. Economists view it as the foremost adversary of the economy, diminishing people’s purchasing power and exacerbating the hardships faced by those with middle and lower incomes. This, in turn, leads to a decline in consumer living standards, fostering a sense of despair that ultimately fuels social unrest.
The ongoing Russia-Ukraine war, which initiated a global recession in 2022 that persists, has contributed to an escalated inflation rate worldwide. Just as leading economies began to gain control over the soaring inflation, the commencement of the Israel-Gaza conflict significantly worsened the situation. In response to Israel’s actions in Gaza, Houthi rebels in Yemen initiated attacks on Israel-bound container ships two months ago, demanding an immediate ceasefire. In retaliation, the US and British military launched numerous airstrikes across Yemen against Houthi forces, responding to months of attacks on merchant ships in the Red Sea. Subsequently, on January 13, oil prices surged by 4%, prompting concerns among experts that this may further elevate the global inflation rate.
Economists suggest that an inflation rate between 2% and 5% is manageable for public life, while a range of 7% to 10% is deemed perilous. Once inflation surpasses the 10% threshold, it is considered catastrophic, signifying a surge in the cost of living and causing unbearable discomfort in public life. Particularly for individuals with limited incomes, survival becomes challenging in the face of high inflation.
Effects of Inflation
While one segment of society grapples with the adverse effects of inflation, another segment thrives by capitalizing on the situation. Economists emphasize that individuals with limited incomes bear the brunt of inflation’s impact, but they contend that swift government and central bank intervention can effectively bring the situation under control.
Various facets of public life feel the repercussions of inflation:
Standard of Living: The lifestyle of the common people, especially those with limited incomes, is significantly impacted by inflation. Decreased purchasing power compels many to curtail their expenditures, yet traders and producers of essential goods benefit from the effects of inflation.
Fixed and Variable Income: Individuals with fixed incomes, including job holders without annual raises, face considerable challenges as inflation reduces their purchasing ability. Those dependent on fixed incomes, such as pensions or interest from bank accounts and savings certificates, are also affected. Conversely, those relying on variable income, such as traders or stock market investors, benefit from inflation as it often leads to increased company profits and higher dividends.
Import and Export: Inflation triggers the depreciation of local currency, resulting in increased export volumes, albeit with unchanged export prices. For instance, a country like Bangladesh may sell more products to the United States for the same $100, as the falling currency value allows for greater purchases. Conversely, as currency values decline, imports from other countries decrease, posing a risk of loss for import-dependent nations, as they need to spend more to acquire the same goods.
Production and Employment: Inflation elevates the overall cost of production due to rising raw material costs, leading to increased prices of goods. This situation poses a risk of reduced production, and a slowdown in production could result in job losses for many individuals.
How to control inflation
Fahmida Khatun, the Executive Director of the Centre for Policy Dialogue, highlighted that the primary factor driving inflation is the escalation in the amount of money circulating in the market. She recommended implementing changes in the country’s monetary and fiscal policies to address this issue.
Fahmida Khatun, Executive Director, Centre for Policy Dialogue
Regarding monetary policy, Khatun emphasized that curbing the supply of money is crucial to controlling inflation. One approach is to reduce the amount of loans taken by banks from the central bank to address liquidity crises. This reduction would ultimately decrease the total money in circulation and help regulate inflation. To achieve this, the central bank employs monetary policy by adjusting the interest rate at which it lends money to commercial banks and by selling government bonds in the open market.
In terms of fiscal policy, Khatun proposed that the government can diminish people’s disposable income by increasing taxes or imposing new taxes. This reduction in excess currency in the market can be complemented by the government cutting expenditure in unproductive sectors and boosting the supply of demanded goods by increasing subsidies in productive sectors.
To alleviate inflationary pressure, Khatun suggested increasing imports to enhance the supply of goods in the market. This could be achieved by lowering import duties during inflationary periods. Additionally, she stressed the importance of the government ensuring the supply of daily essentials according to demand, preventing unscrupulous business syndicates from taking control of the market by potentially fixing maximum prices for different essential items.
“To bring down inflation caused by increased cost of living, imports must be reduced, especially of non-essential and luxury goods.”
– Economist Faruk Moinuddin
Economist Faruk Moinuddin underscored the need to address monopoly pricing by market syndicates, particularly in the food sector despite the country’s bumper crop yields. He emphasized that reducing imports, especially of non-essential and luxury goods, should be the government’s top priority to combat inflation caused by rising living costs.
