Introduction

As we know Bangladesh is a country of middle income. Nearly 65% of total population income is less than $1. Bangladesh is primarily an agrarian economy. 66% of in Bangladesh people are work in agriculture sector. Nowadays price hike is one of the main concerns of Bangladeshi people. Though their income is not increase as much as need but their expenses are increases day by day. As a result people consume more than their income. And poor people are getting poorer day by day. Government has taken some short-term policies but those are not paying off.

In this report we try to understand that why price hike in Bangladesh, what is the reason behind it an, what consequent are arises among Bangladesh people for these unsustainable price hike in consumption goods and what are the initiative measures government can take to at least make the price level sustainable.


What is Inflation?

Inflation is the rise in general level of prices of goods and services. It can be said in other ways that inflation is the decrease in value of money. It means that
• Each dollar can purchase fewer amounts of goods and service then previous.
• It reduces the purchasing power of the currency.

Inflation does not mean that all prices are increasing, even during period of rapid inflation; some prices may be relatively constant while others are falling.

The troublesome aspect of inflation is that prices rise unevenly, some raises sharply, some slowly and some don’t rise at all.

The main measure of inflation is the consumer price index.


Classification of Inflation [theoretical view]:

Economists distinguish between two types of inflation, those are described below;

Demand–Pull Inflation: Demand - pull inflation is occurred when the demand for goods and services exceeds the actual production capacity of the economy.
It happens for mainly;
• Availability of the money increased in the market.
• Spending of the people increase.

Cost-Push Inflation: Cost-push inflation occurs when per unit production cost increase and profitability of producing is not attractable. As a result the economy’s supply of goods and services declines and the price level increase.


Literature Review:

In general, the cause of inflation in Developed countries is broadly identified as growth of money supply, based on the famous Premise of the great monetary economist, Milton Friedman “inflation is always and everywhere a monetary phenomenon.” According to Friedman’s quantity theory of money there is a general agreement that growth in the quantity of money is the primary determinant of the inflation rate (Mankiew, 1997:156). In developing countries, in contrast, inflation is not a purely monetary phenomenon, but is often linked with fiscal imbalances and deficiencies in sound internal economic policies. Beside, factors typically related to fiscal imbalances such as higher money growth and exchange rate depreciation arising from a balance of payments crisis dominate the inflation process in developing countries, as discussed by Montiel (1989); Sergent and Wallace (1981); Liviatan and Piterman (1986). Seasonal shortages pertaining to agricultural production and other supply side bottlenecks such as international oil price are also known as the common factors of inflation in developing economies.

There are a number of studies in Bangladesh context where the dominant factors explaining the
Inflationary processes in Bangladesh have been examined; though only a few of them are recent. In an early study, Taslim (1982) attempted to analyze the inflationary process in Bangladesh in light of the structuralist-monetarist controversy using the data for FY60 to FY80. The author systematically tested both the views in the context of Bangladesh as well as a hybrid model considering both views together. The findings clearly indicate that the rate of change of money supply and devaluation are the most significant explanatory variables. Any devaluation of the domestic currency is followed by an almost equal proportionate increase in the rate of inflation, while an increase in money supply does not induce an equal proportionate increase in the inflation rate as would be suggested by an extreme monetarist view.

In contrast, in formulating a model of inflation for Bangladesh, Begum (1991) considers a detailed approach that concentrates both on aggregate supply and demand. The empirical test shows that the significant variables for inflation are agricultural and import bottlenecks, government expenditure, rate of interest, wage rate, Bank credit and expected inflation. The results regarding agricultural bottlenecks, rate of Interest and credit show the dominance of the supply-side cost-push effect, while the results regarding import bottlenecks, government expenditures, wage and expected inflation show the dominance of the demand side effect.

On the other hand, in investigating the relationship between money, prices, output and exchange rate in Bangladesh during the period 1974-92, Chowdhury et al. (1995) find that the inflationary process in Bangladesh cannot be explained exclusively by the monetarist or the structuralize factors. The paper noted that monetary shocks have a strong, but relatively short-run, impact on inflation, and therefore suggested that tight money may put a short-term dampening effect on inflation and help stabilize the foreign trade sector, but may also cause a slowdown in the economy.

Akhtaruzzaman (2005) attempted to identify the variables that are believed to generate inflation in Bangladesh during the period 1973-2002. The paper observes that inflation is
negatively related with real income. In addition, both the level and rate of the devaluation of exchange rate, growth of money supply and deposit interest rate have statistically significant role in explaining the inflationary process in Bangladesh. The analysis of above empirical studies in the context of Bangladesh suggests that both monetary and structuralize factors are relevant in explaining the inflationary process.