Prioritizing inflation control for economic resilience

According to the data from the Bangladesh Bureau of Statistics (BBS), the overall inflation rate in the country reached 11.38 per cent in November. This is the highest inflation rate in the past four months. Inflation is rising across both urban and rural areas. Among this, the food inflation rate was 13.80 per cent, the second highest in the last 13 and a half years. In July, the food inflation rate had reached 14.10 per cent. The goal of the monetary policy announced by the Bangladesh Bank is to control high inflation by reducing the money supply in the economy; however, no measures have been successful in controlling high inflation so far. There are no visible signs of inflation coming under control, and inflation continues to rise steadily.

High inflation plays a crucial role in eroding the popularity of a government. People are not interested in hearing fairy tales; they want to buy essential goods within their means when they go to the market. Particularly, they want to purchase the essential items at relatively affordable prices. Unfortunately, the people of Bangladesh are in a state where they have become deaf to the tales of development; yet, the authorities are not hearing their silent cries. During the previous government’s tenure, various misleading information was spread to show success in economic and social sectors. A member of the white paper drafting committee stated that during the previous government, the BBS artificially reduced the inflation rate and exaggerated the GDP growth rate. There are doubts about the current inflation rate as well, and he opined that the actual inflation rate might be between 15 per cent and 17 per cent.

The BBS (Bangladesh Bureau of Statistics) is a state-owned institution. Its responsibility is to present statistics on the economy and other sectors impartially, so that national policies can be formulated based on these statistics. However, it is unfortunate but true that no government in the past has allowed this organization to work independently and responsibly. As a result, the information and statistics released by the BBS on various issues have not earned the trust of the general public. It became the norm for the organization to downplay negative issues and exaggerate positive achievements. Under the current interim government, the BBS must be restructured in such a way that no group can create obstacles in the preparation of accurate statistics. There has been a demand from the officials of the BBS themselves to be allowed to work in an environment where they can accurately present the real situation.

There may be questions about how the Bangladesh Bureau of Statistics (BBS) determines the inflation rate. The institution generally uses three methods to assess whether inflation has increased or decreased. One method is year-on-year comparison. For example, comparing the inflation rate of the 2021-22 fiscal year with the overall inflation rate of the 2022-23 fiscal year reflects the change in annual inflation. Another method compares the inflation rate of March 2023 with that of March 2024. Additionally, the monthly inflation rate is determined by comparing the inflation rate of one month with the next. For instance, comparing the inflation rate of October with that of November.

Currently, the method used by the Bangladesh Bureau of Statistics to calculate inflation is called the Consumer Price Index (CPI). This method takes into account the prices of items in a specific product basket to determine whether inflation is rising or falling. For urban areas, 422 product prices are considered, and for rural areas, 318 product prices are considered. Among these, 242 items are food products, and the rest are non-food items. The change in price of any one or two items does not significantly affect overall inflation. In other words, the overall inflation rate is determined by considering the total price changes of these items. The BBS officials collect data from selected markets in each district to compile these statistics.

Currently, the method used by the Bangladesh Bureau of Statistics to calculate inflation is called the Consumer Price Index (CPI). This method takes into account the prices of items in a specific product basket to determine whether inflation is rising or falling. For urban areas, 422 product prices are considered, and for rural areas, 318 product prices are considered. Among these, 242 items are food products, and the rest are non-food items. The change in price of any one or two items does not significantly affect overall inflation. In other words, the overall inflation rate is determined by considering the total price changes of these items. The BBS officials collect data from selected markets in each district to compile these statistics.

The inflation rate is calculated based on this data to determine whether inflation is increasing or decreasing. However, there are some issues with determining inflation using the Consumer Price Index (CPI). Among the items considered in this method, there are some whose consumer demand is relatively low. The price changes of such items have little impact on the consumer's daily life. For example, during Eid-ul-Adha, the demand for knives and other tools increases, but these items are not frequently used at other times of the year. If such items are included in the product basket for calculating inflation, their relative importance diminishes. However, the price fluctuations of staple items, like rice, have a significant impact on overall inflation. This is because, regardless of wealth, everyone needs food, and thus, the rise in rice prices affects everyone. It is known that the Bangladesh Bureau of Statistics is planning to implement a new method for calculating inflation called the Core Inflation Index in the coming days.

Fifty essential products, widely consumed across all levels of society, will be included in the Core Index system. Inflation will be calculated based on the price fluctuations of these products. For more than two years, the domestic economy has been experiencing a high inflation trend, which has been difficult to control. Just as the global economy was beginning to recover after the COVID-19 pandemic, the Russia-Ukraine war began. At the start of the war, global food production was at a normal level. Together, Ukraine and Russia supply 30 per cent of the world's grain, but due to the war, Ukraine was unable to supply its food products to the global market. As a result, many countries in Africa and the Middle East faced severe food shortages. The high inflation trend observed worldwide recently has not been caused by reduced production, but rather by transportation bottlenecks.

In the United States, inflation surged to a 40-year high, reaching 9.1 per cent, the highest it had been in decades. In response, the Federal Reserve Bank of America (Fed) significantly increased the policy rate (the interest rate charged by the central bank to scheduled banks when they borrow), among other measures, with the aim of reducing the money supply in the market. As a result of this increase, scheduled banks raised their lending interest rates proportionally. While raising the policy rate reduces the money supply, there is a risk that it could slow down private investment. However, this did not occur in the United States because, alongside the rise in the policy rate, interest rates on various savings schemes also increased.

Many American citizens, who had invested abroad expecting higher returns, withdrew their investments from foreign countries and brought the funds back to the US. In line with the US policy, at least 77 countries' central banks around the world raised their policy interest rates. Bangladesh's central bank has also raised its policy rate multiple times, increasing it from 5 per cent to 10 per cent. Recently, a report stated that the US inflation rate had dropped to 3.2 per cent. Now, the country is considering lowering the policy rate. Meanwhile, in Sri Lanka, a country facing significant economic challenges, inflation had skyrocketed to 75 per cent, but it has now decreased to below 2 per cent.

The question is, if Bangladesh Bank has been raising the policy rate multiple times, why isn't inflation decreasing? While Bangladesh Bank has increased the policy rate, the interest rate on bank loans had been capped at a maximum of 9 per cent until recently. As a result, taking loans from banks remained relatively easy. During this period, some beneficiaries took advantage of these low-interest loans and diverted the funds into other sectors or even laundered them abroad.
However, it must be remembered that simply raising the policy rate or using monetary policy to curb inflation is not enough. Seventy-five percent of the total consumable goods in Bangladesh are locally produced, while only 25 per cent of goods are imported. Locally produced goods often face various obstacles when reaching the consumer market. As a result, products that a local producer may sell at 20 Taka per kilogram in rural areas often end up being sold at 100 Taka at the consumer level.

There is minimal government control over the market. Without ensuring transparency and accountability in the supply chain, no initiative can be fully successful in controlling high inflation. The general public has high expectations from the current interim government. They are not concerned with when reforms or elections will take place; their primary concern is their economic situation. People do not expect the government to provide three meals a day for every household. They want the ability to purchase goods from the market for their families with their own earnings. The interim government's main priority should be to ensure that the prices of goods are reduced and brought within the purchasing power of the common people.

M A Khaleque: Retired General Manager, Bangladesh Development Bank PLC and a writer on economic issues.