Today’s economic systems are a lot more complex and interrelated than they were even a century earlier. With the advancement of trade and globalization, economies are becoming highly interlinked, both internally and externally. The fundamentals of macroeconomic models may differ, but they aim for a similar set of goals – reduce unemployment, foster growth, and stabilize the cost of living, including the price people pay for factors of production and final goods and services. In the study of Economics, this is measured through inflation – the rate at which money at hand loses its value.
Simply put, if a hundred-taka note today buys a box of french fries, tomorrow, the same hundred-taka note will buy less of it because the value of the item has risen with time. If the steep rise of price diffuses throughout the market, ordinary people will feel the blow in the form of lowered purchasing power and higher living expenses. The effect will also be felt in the function of money as a unit of account and medium of exchange. But different people will react differently to the change as not everyone opts for a similar product or service.
HOW DO WE MEASURE THIS EROSION OF PURCHASING POWER?
One common mistake while discussing inflation is confusing it with an increase in the level of money circulating in the economy. The terms are not synonymous. Instead, the money supply is one of the many factors behind the price hike. The calculation is circumstance specific as it depends on time and the sets of goods and relative substitutability of the products under speculation. Among the many methods available, the most commonly used methods are the Consumer Price Index (CPI) which uses consumer prices and the GDP deflator, which measures inflation in the domestic market.
Today, most mainstream economists favour a low and steady rate of inflation. Low inflation may reduce the severity of economic recessions by enabling the labour market to adjust more quickly in a downturn and reduce the risk of a liquidity trap preventing the monetary policy from stabilizing the economy. Keeping the rate of inflation low and stable is usually given to monetary authorities. Generally, these monetary authorities are central banks that control the size of the money supply by setting the interest rate, carrying out open market operations, and deciding on bank reserve requirements.
Pinpointing the exact cause of the upswing in price is tedious, if not impossible. Macroeconomic variables are highly interlinked, and a slight change in one may impose a butterfly effect on other variables.
AN INSTANCE WHERE CALCULATIONS WENT OUT OF HAND
A slight increase in price yearly will still decrease welfare, but rational human beings would get accustomed to the change and change their behaviours accordingly. But imagine price being so volatile that it increases from the time you decide to buy a product to the moment the cashier registers the purchase. This economic reality underpins Venezuela’s ‘Political Crisis’, which rendered a state of emergency in 2016. By 2018 inflation was estimated at 80,000%.
More than 90% of the Venezuelan economy and value of its currency, the bolívar, we’re dependent on oil export. In the face of globally plunging oil prices, the demand for the bolívar to buy Venezuelan oil crashed. It hiked the price of imported goods for residents. The government tackled the situation by printing more money which only worsened the case.
BUT WHAT CAUSES THIS UPSWING IN THE PRICE?
Pinpointing the exact cause of the upswing in price is tedious, if not impossible. Macroeconomic variables are highly interlinked, and a slight change in one may impose a butterfly effect on other variables. But generally, economists state that inflation and hyperinflation are caused by excessive money supply growth. Views on which factors determine the level of inflation are more varied. However, some economists view actual demand for goods and services and relevant supply parameters as contributory factors to price change.
THE COST OF LIVING IN BANGLADESH IS MORE EXPENSIVE THAN WE THINK
The statement may surprise many people, especially those who consider only the exchange value of currencies when comparing the price of something. In reality, the cost of living in Dhaka is more expensive than in Washington DC and Dubai, at purchasing power parity. The 2021 ‘Cost of Living’ survey by New York-based company Mercer provided a comparative picture of the cost of living for foreigners in different cities worldwide. The capital city of Dhaka claimed the 40th position among 209 cities on the list. The list considered the cost of housing, transportation, food, and entertainment in New York as a benchmark in analysis. Experts highlight the unreasonably high land and real estate price reflected in the rent people pay to live here as the pioneering cause of the poor ranking.
Inflation in Bangladesh rose for a third consecutive month in September 2021, to a whopping 5.59% from the previous calculation of 5.54% just a month earlier, averaging 5.50% points for the twelve months from October 2020 to September 2021. Prices for both food and non-food items have skyrocketed globally in the face of demand recovery and supply constraints. The effects of the quirky price hike were also felt in the Bangladeshi economy. The situation was particularly worrisome in June as inflation was recorded at 5.64%. It cooled down in the following months of July and August but rose again in September, as noted earlier. According to the BBS data, the rate of inflation in July was recorded at 5.36% and in August at 5.54%.
FOOD AND NON-FOOD INFLATION
Bangladesh Bureau of Statistics (BBS) records clothing, housing, and other household items to gauge non-food inflation. In contrast, food inflation covers price spirals for staples, flours, sugar, fish, and eggs. The national statistical agency shows the rate of non-food inflation swelled to 6.48% in October from 6.19% in the previous month, the highest in the last five years. Before this, August 2016 logged the highest 7% non-food inflation. Experts attribute this rise in non-food prices to the depreciation of our currency, leading to more expensive imports and supply crunch, alongside the release of suppressed demand by consumers, causing a demand surge. The data show the rate of food inflation at the national level at 5.22% in October, a 0.01% point increase from September. The food supply just before winter usually witnesses a crunch, thus leading to edging up of price level.
Food inflation is notably higher in rural areas at 5.62% compared to urban areas, whereas urban non-food inflation registers a higher value at 6.89%. Economists, however, take the reported price levels with a grain of salt, especially in the case of food inflation. It may be a bit of a stretch, but people’s perception seems to support scepticism. But it should be noted that the calculation is not infallible. Mainstream measurement techniques ignore improvements in product quality or use of better technology and focus only on year-to-year price comparison.
HOW INFLATION AFFECTS OTHER MACROECONOMIC VARIABLES
Inflation erodes the value of money at hand. In the face of lowered interest rates, savings in our country is already minimal. On top of that, inflation can make the money worth even less. It will also affect long-term investment in bonds as people expect the value of money they receive on bonds to fall, discouraging people from making long-term investments. Poor ranking in the Cost of Living Survey and Global Liveability Index has deterred foreign investment in Dhaka, the result of which is quite evident.
The inflation rate in the UK rose to 3.1% in 2021, far above the Bank of England’s target of 2%. The increase resulted mainly from higher furniture and household goods prices though prices at restaurants and cafes rose less than last summer.
GLOBAL SITUATION
The inflation rate in the UK rose to 3.1% in 2021, far above the Bank of England’s target of 2%. The increase resulted mainly from higher furniture and household goods prices though prices at restaurants and cafes rose less than last summer. Meanwhile, global fuel prices have continued spiraling upwards, putting inflationary pressure on transportation. The worsening energy crisis and increased business costs are putting economies across continents on the brink of upheavals. The United States reported a 5% increase in the collection of goods compared to last year’s value.
IS INFLATION A CAUSE FOR CONCERN?
While inflation has a negative connotation, some level of inflation indicates that the economy is on a recovery path. In the post-pandemic period, many economies lowered their interest rate, enacted stimulus packages and consumers unleashed suppressed demand, all of which drove the prices up. On the other hand, if prices fall, people may be reluctant to spend today in hopes of getting the items for a cheaper rate tomorrow. Experts advocate for an optimum level of a 2% price hike every year for balanced growth, but the value depends on circumstances.
To achieve that, the government needs to ensure a smooth supply of essential items alongside raising interest rates if prices rise quickly. If the cost of borrowing rises, people spend less, and prices are driven down. Otherwise, people may keep noticing a fall in the ‘real value’ of their earnings – what they earn will always buy less.
