Inflation kept people under pressure throughout the financial year

The people of the country have faced the most severe inflation in a decade during the previous fiscal year. This level of pressure has not been witnessed since the 2010-11 fiscal year. According to the Bangladesh Bureau of Statistics (BBS), the inflation rate for the 2022-23 fiscal stood at 9.02 per cent, marking the highest inflation rate year-wise over the past decade.

However, the inflation came down slightly in June as per month-wise record that accounted for 9.74 per cent. Inflation in the previous month was 9.94 per cent. But food inflation has shot up. These figures were released yesterday, Monday

The Russia–Ukraine war has led to a surge in commodity prices across the globe and an appreciation of the dollar at home, resulting in higher import costs, which has fuelled inflation, economists believe.

Besides, production costs at the local level have also gone up due to the increase in fuel prices. The experts also blamed lack of supervision to prevent price hikes through manipulation in the market.

Despite the finance minister’s target, set during his budget speech, of average inflation at 5.6 per cent, at the yearend the rate of inflation was nowhere close to the projected target. The inflation rate remained higher than the target throughout the year without any decrease in any month.

The previous fiscal started (July) with an inflation rate of 7.48 per cent. Later in August, inflation rose to 9.52 per cent as the price of all types of fuel oil spiked. Apart from this, the prices of various utility including gas, electricity have also gone up.

The inflation rate could not be reined in after that. It kept fluctuating throughout the year. Meanwhile, inflation reached 9.94 per cent in May, which was the highest in the past 11 years.

Planning minister MA Mannan told Prothom Alo, “Earlier, I mentioned that inflation would decrease somewhat in June, and indeed, that prediction has come true. On the other hand, the wage rate has also increased. But overall inflation is still high, which is putting pressure on people. Initiatives to reduce development projects and government expenditure have continued in the current fiscal.

"Additionally, the price of fuel oil has eased in the global market, allowing potential adjustments in the domestic market. Such adjustments could contribute to a decrease in inflation. Furthermore, if there is no political instability, there is a possibility of further reduction in inflation.” According to him, if the import and export of goods is disrupted due to monsoons and heavy rains, inflation may increase.

Cause of inflation

Finance minister AHM Mustafa Kamal admitted in his budget speech that the average inflation target will not be achieved in the outgoing fiscal. He said, "It is unlikely to keep the annual average inflation limited to 5.6 per cent as per the projected target." He cited two reasons for this - price hike of commodities in the world market due to the Russia-Ukraine war and the depreciation of the hard currency in the country.

Selim Raihan, executive director of the South Asian Network on Economic Modelling (SANEM), has identified three primary factors contributing to the rise in inflation. He noted that several countries, including India, Indonesia, and Vietnam, have increased their interest rates to combat inflation. However, Bangladesh Bank refrained from taking action to address inflation for a year and a half. As a result, with inflation soaring to nearly 10 per cent, Bangladesh Bank has finally initiated measures to tackle the issue.

Furthermore, there is a duty and tax of Tk 40-45 per litre on fuel oil, which exacerbates inflation. If these levies were temporarily exempted, there would be no need for additional price hikes. Moreover, adequate measures have not been taken to effectively monitor the internal market and prevent the escalation of food prices. A recent example of this is the exorbitant increase in onion and green chilli prices.

The ongoing conflict between Russia and Ukraine since the start of last year has led to a significant surge in prices for various goods on the international market. Capital equipment, intermediate goods, iron, and other products have experienced multiple price increases. Consequently, local importers in the country are forced to procure these products at higher prices, which in turn impacts the domestic market.

The price of the dollar started surging from April last year. The dollar price has increased from Tk 86 to Tk 109. The dollar rate had increased by 25 per cent within a year resulting in higher import costs. As a result, prices of various products in domestic market also went up.

The government has also taken comparatively more bank loans in the outgoing fiscal year. It borrowed around Tk 785.6 billion from the banking system till mid-May. This is also said to be another reason for rising inflation.

Economists have recommended several measures to control inflation effectively. These include raising interest rates and aligning them with market forces, reducing the prices of essential commodities such as fuel oil by lowering duty and tax rates, and promoting active involvement of government agencies like the Directorate of National Consumer Rights Protection and Bangladesh Competition Commission to address market irregularities and ensure efficient market management.

Food inflation increased slightly

Food inflation has become a cause for concern. While overall inflation eased slightly in June, food inflation slightly rose. According to the updated data of BBS, food price inflation was 9.73 per cent in June whereas it was 9.24 per cent in May. The planning minister said that the price of onion and sugar has been affected due to food inflation.

On the other hand, non-food inflation was 9.60 per cent in June. In May it was 9.96 per cent. Besides, the overall price inflation in rural areas is now 9.82 per cent, which in urban areas is 9.45 per cent.

The BBS now uses the UN's Classification of Individual Consumption According to Purpose (COICAP) method to calculate inflation. It shows, housing, gas-electricity-water services; entertainment, house maintenance and repair- these three sectors witnessed inflation of more than 11 per cent.

Economists have recommended curbing inflation be prioritised in the next budget. But no major initiatives were taken in the budget presented on 1 June. The average inflation target for the current fiscal has been fixed at 6 per cent.

Other countries managing inflation

Bangladesh failed to contain inflation in the last one year. But various countries of the world including United Kingdom, United States, India, Sri Lanka, Nepal, Bhutan, Vietnam, Indonesia have managed to reduce inflation.

The central banks of these countries have implemented various measures to address inflation, including raising interest rates and reducing import demand and expenditure. India, for example, has successfully lowered inflation from 6.5 per cent to 1.4 per cent over the past five months. On the other hand, the United Kingdom experienced its highest inflation rate in 41 years at 11.1 per cent in October.

However, by May, it had decreased to 8.7 per cent. Similarly, the United States witnessed a decline in inflation from 6.4 per cent in January to 4.05 per cent in May. These recent months have witnessed a decrease in inflation levels within these respective countries.