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.

Inflation in Bangladesh, Recent price hike & its causes and effects on general people

Recent facts

Recent time during fiscal year [2007-2008] the price of the goods and services increase beyond the capabilities of the poor people. The point-to-point inflation climbed down below the double digit compared to that in July and August. The point-to-point inflation reached 10.10 points in July for the first time in the last two decades and went up further to 10.11 points in August this year.

Point-to-point inflation soared to its record high of 10.10 per cent in July and inched up by 0.01 per cent in a month, Bangladesh Bureau of Statistics data showed.

Economists and a consumer rights activist said unabated price hike of food items led to the double-digit growth of inflation and called for urgent steps to give consumers a respite from skyrocketing prices and restore business confidence.

However, the provisional data prepared by the Bangladesh Bureau of Statistics (BBS) and sent to the planning ministry showed that food inflation has dropped in both rural and urban areas.

Year	Inflation rate (consumer prices)	Rank	Percent Change	Date of Information
2003	3.10 %	117		2002 est.
2004	5.60 %	67	80.65 %	2003 est.
2005	6.00 %	160	7.14 %	2004 est.
2006	7.00 %	160	16.67 %	2005 est.
2007	7.20 %	163	2.86 %	2006 est.

The main problem is that the prices increase of daily commodity and essential food items such as rice, powder milk, soybean oil and grains and vegetables. The prices of the shopping goods are moderate in terms of daily convenient goods.

Overall inflation rate continues to increase with a 0.85 percentage point increase in April compared to the rate in March. 0.45 and 1.59 percentage points increase inflation rate of food and non-food items.

Inflation rate	Rural	Urban
Food	8.79	9.44
Non-food	7.83	6.09

Many economists raise there cautionary about price increase, “The country’s economy would head for a state of stagflation if the government fails to cool off some heat and check erosion in business confidence” economist Atiur Rahman cautioned.

Official statistical agency’s figures show annualized average inflation kept on creeping up steadily from as low as 1.66 per cent in 2000-01 fiscal year to 7.1 per cent in 2006-07; The rate was 3.58 in 2001-02 and continued to go up since then, with 5.03 in 2002-2003, 5.64 in 2003-04, 7.35 in 2004-05 and 7.54 in 2005-06, according to the economic survey of the finance ministry.

The jump was more galloping in point-to-point counts this year, from 5.94 per cent in January to 10.11 in August.

Remedy of Inflation

Unfortunately, there is hardly any market oriented policy move on the part of fiscal or monetary authorities that can be taken for checking the cost induced inflation. On the fiscal side, although cutting down of the indirect tax on commodities is often proposed as a remedial measure, it only makes a temporary contribution to reducing inflation. Long-term continuation of such policy may cause continuous erosion of the government exchequer. Some also argue in favor of government control on wage increases that are not supported by the corresponding increase in productivity to resist wage-price spiral. In Bangladesh, however, the presence of powerful trade unions tends to render the implementation of such control almost impossible. On a positive note, however, our analysis did not find any noteworthy impact of wage growth on inflation. It is widely recognized, however, that government can effectively use its legal powers to break up the market syndication and thus improve competitiveness of the distribution network.

On the monetary side, in the absence of any direct controlling instrument, Bangladesh Bank can initiate some case specific counter-action. Bangladesh Bank can take over some responsibilities such as monitoring modalities of Letter of Credit (L/C) operation so that market forces determines the exchange rate in a process that remains free from much speculative transactions.

• Renowned economist Prof Rahman Siobhan at a recent seminar organized by the Center for Policy Dialogue (CPD) said inflation hurts ordinary people of the country. So, monetary policy of the central bank should ensure their welfare. Appreciating government measures after the devastating floods in 1998, he said the central bank should take proper steps in line with those post-flood programmers.

• Following the government move, Tk 2412 crore is going to be allocated in the revenue    budget for increasing agriculture production and to supply agricultural inputs at low costs. Of this amount, Tk 350 crore will be allocated for agriculture research, Tk 750 crore for diesel supply and Tk 1312 crore for supplying fertilizer and electricity at subsidized rates.

• The government has already taken some initiatives to check inflation. The chief adviser in his address to the nation on Sunday mentioned some government programmers like Open Market Sale (OMS). Price of rice under OMS has been fixed at Tk 19 a kg against the import cost of Tk 25 per kg. Import of 900,000 tones of food grains under government initiative during the current fiscal year is now being finalized.

• The central bank can use two instruments – interest rate hike and lower money supply – to curb inflation. Central bank can issue government bond and securities in the market to reduce the money supply.

• The import rate of Bangladesh is highest among other south Asian country [almost 35%], so the price of goods and services fluctuate based on the rise and fall in world price. To stabilize rice price in domestic market, the government should import coarse rice from Myanmar or Indonesia or any other country where rice is cheaper.

• Stock market can play a important role in controlling inflation by easing the investment policy and implying effective monetary control on the profit distribution of companies to the investors.

• Government can imply the flexible terrif and quota system to control the import price and make it stable in the domestic market.

• Government should find the alternative country or place for importing goods rather than depending only on India.

• Unethical storing or warehousing should be controlled with developing new laws and efficient apply of consumer law.

• Government can establish new agencies like TCB or make sure their continuous efficient operation.

• And at last try to ensure the domestic production is increasing and take active and elaborate plans for that and ensure the swift and smooth agricultural production.

Causes of Inflation

Bangladesh has no specific reason of inflation at present. Inflation is increasing more and more for several reasons. But all reasons are not equally important. Some reasons influence more and some reasons influence less. We have identifies have identified some reasons of inflation after the observation of last several months.

Sources said inflation rate in the recent period increased due to price hike of food items in both domestic and international markets. Inflation in Bangladesh also surged due to 21 to 33 per cent increase in the prices of petroleum products by the government.

The reasons of inflation are:

1) Lower growth in agricultural sector
2) Raising price in world market     
3) Raising price of fuel      
4) Decreasing the price of money    
5) Import cost
6) Supply Shortage
7) Market Syndication
8) Increase in wage rate
9) Exchange rate
10) Syndicate in market      
11) Taking initiative against corruption/ fear among businessmen.

1) Lower growth in agricultural sector:

This year [2007-2008] was full of natural calamity like flood and cyclone, and these              hamper the agricultural production very much. And also mismanagement in fertilizer distribution, insufficient electricity supply hampers production.

2) Raising price in world market:

Being a fundamental input of production, oil constitutes a significant portion of production cost in every sector of the economy. In spite of some recent adjustments in the administered price of energy products, much of the increased cost of imported fuel has not been passed on to end users, especially on diesel and kerosene. An increase in the diesel price stimulates inflation via increases in both food and non-food prices in both urban and rural areas.

3) Raising price of fuel:

The net impact of recent fuel price is unlikely to be significant but it would have effect   on poor people, whose livelihood depends on the use of kerosene and diesel. In order to catch up with the cost of imported oil, domestic prices have just been announced to go up immediately, which will result in a one-shot increase in CPI, followed by a round of gradual adjustment.  Higher price, to some extent, is not domestically induced. Rather it is attributed to an increase in international prices, particularly of several food items as well as items such as steel and oil.
If we look at the international price of the oil then we see that oil price that was 25 dollar per barrel in 1999FY now it is 98.99 dollar. Which affect almost every sector such as industry, agriculture, transportation and increasing the cost of production.

5) Import oriented:

Typically import occupies a significant place in the Bangladesh economy, most of the essential food items (for example, sugar, rice, wheat, onion and edible oil) and, more generally, machineries, intermediate goods and raw materials used in production are imported. Cost of imports can, therefore, be expected to have a substantial influence on domestic inflation directly (through final goods) or indirectly (through intermediate goods). According to available statistics, import price index (MPI) of Bangladesh has continuously soared over time. Import is increasing gradually day-by-day and sudden hike international price or decrease in real interest raise the price of the goods. Bangladesh Bank (BB) has projected continuous inflation in the domestic economy due to constant external pressure on prices and demand side.

If we look very closely, we see that most of the goods we import are mainly convenient and household goods like households [rice, oil, powder-milk. grains, flour etc]. So if the world price raises it affects the persons and economy directly. And decrease the purchasing power. 

Year	Imports	Rank	Percent Change	Date of Information
2003	$8,500,000,000	65		2002
2004	$9,459,000,000	65	11.28 %	2003 est.
2005	$10,030,000,000	67	6.04 %	2004 est.
2006	$12,970,000,000	66	29.31 %	2005 est.
2007	$13,770,000,000	70	6.17 %	2006 est.

The central bank in a study published in its October-December quarterly also assumed that Indian inflation would appear to have a more direct effect on the Bangladesh food price induced inflation than price developments in other food-exporting countries.

Production in agriculture and fisheries sectors in Bangladesh is still subject to the whims   of nature to a notable extent. It has been claimed that one of the main causes of the high inflation rate is the supply shortage of the agricultural and industrial goods.

7) Market Syndication:

Unfair cartel among the suppliers might seriously hamper the course of the economy by engendering inflation via the creation of a false supply shortage even during a period of robust growth in production. Such an undesirable event allegedly occurred in FY06 when the food inflation remained high (7.76 percent) in the same fiscal year despite the growth in food production (4.49 percent8 vis-à-vis 2.21 percent in FY05). Monopolistic control of several food items such as sugar, onion, pulses and edible oil by market syndication seems to have led this situation.9 Obviously such manipulation is a type of supply side disturbance.

8) Increase in wage rate:

The role of inflationary expectations is also important in explaining inflationary process in a given period. If workers expect a rise in the inflation rate, they will demand higher nominal wage to keep their real wage stable. Once people come to expect high rates of inflation, the expectation alone will generate further inflation without any change in the existing labor market conditions. In general, if there is a lack of confidence in monetary policy, inflationary expectations are likely to be self-fulfilling.

9) Exchange Rate:

Exchange rate exerts inflationary pressure mainly via import prices. Historically, exchange rate in Bangladesh exhibited steady increase over time. The period average BDT-USD exchange rate was recorded at 69.39 during FY07 in comparison to 67.29 in 2006, 40.20 and 50.31 during FY95 and FY00 respectively. The comparable FY06 figure rose to 67.08. Exchange rate generally increases the import cost and that cause inflation.

11) Taking initiative against corruption/ fear among businessmen:

Taking initiative action against corruption and corrupted businessmen by the recent take-care government put fear among the businessmen. So most of themselves take away themselves from normal business flow or import and this occur shortage in goods and create inflation.

Does Inflation affect the development?

Over the past few decades, the relationship between inflation and economic growth have drawn extensive attention of macroeconomists, policy makers and the central bankers of both developed and developing countries. Specifically, the issue that whether inflation is necessary for economic growth or it is harmful generates a significant debate both theoretically and empirically.

In this connection, Mundell (1965) and Tobin (1965) predict a positive relationship between the rate of inflation and the rate of capital accumulation, which in turn, implies a positive relationship to the rate of economic growth.2 They argue that since money and capital are substitutable, an increase in the rate of inflation increases capital accumulation by shifting portfolio from money to capital, and thereby, stimulating a higher rate of economic growth (Gregorio, 1996).

Conversely, Fischer and Modigliani (1978) suggest a negative and nonlinear relationship between the rate of inflation and economic growth through the new growth theory mechanisms (Malla, 1997). They mention that inflation restricts economic growth largely by reducing the efficiency of investment rather than its level.

In terms of Bangladesh

Bangladesh is the youngest country in the South Asian region. The economy has experienced accelerated economic growth during the early 1990s in comparison with the 1980s. However, after that period, the economy experienced most severe exigency states like increasing inflationary pressures, deteriorating government’s budgetary balances and decreasing foreign exchange reserves.

The GDP growth rate declined moderately during the second half of 1980s when inflation rate gradually decreased to below 8-percent. However, a moderate rate of inflation and an increasing rate of GDP growth are observed throughout the 1990s. Throughout the first half of the 1990s, inflation rate was, on average, 5.37 percent, while GDP growth rate was 4.06 percent. Although inflation rate increased, on average, to 5.52 percent in the second half of the 1990s, the growth rate of GDP continued to increase. The increasing trend of inflation rate during the latter half of 1990s had been corrected since the beginning of the new decade after 1990s and was observed at 4.14 percent, on average, during 2001 to 2005, when growth rate of GDP was, on average, 5.19 percent. So the GDP and inflation rate both the positive and negative relations between them.

The development of the economy largely depends on the proportional development of middleclass and poor people. And these classes of people are most affected by the inflation rate or rise in price because of limitation in income. The continuous rise in GDP holds the GDP growth nearly 6% for couple of year.

The price level chart shows that increase in price is the main constraint of savings and investment by both public and private.

If we look the today’s economic giant India and china we see that they were the developing country and now they are the economic giants.

It is surprising but true that both of the country took almost same strategy for developing their nation and that is ‘Banned foreign import to protect, retain and sustain the domestic industry ’ 
Now china and India open their market but their own industry established that time and now they share the export and import in Asian and as well as in America.

But Bangladesh has no similar strategy like that,
• Import destroys our local industry.
• Decreasing the purchasing and standard of living.
• Due to destruction of domestic industry the unemployment rise.
• Import relates with foreign currency and reserves of foreign currency measure the exchange rate, huge volume of import decrease supply and decrease the real exchange rate as well as PPP.

And all this things ultimately affects the GDP, which is the measurement of economic growth and development.

Conclusion

At the import of our report we can say that the main reason of inflation is our internal capabilities of production. That’s why we have to import from foreign. And the main reason of inflation is the huge amount of import. Other all causes like interest rate, supply, exchange rate, and syndication are relative effect of the import. So our suggestion to government will be that government should take the proper steps or plan that increase the total internal production and that can be ensured by concentrate on both local industry and agriculture so that capital per person or employment opportunity and Per capita income rise.   

Reference / Bibliography

1. Trade statistics [01-05]    - Bangladesh burro of statistics.

2. Working Paper Series: WP 0604, Bangladesh bank 
    "Inflation and Economic Growth in Bangladesh”: 1981-2005 
     By Shamim Ahmed and Md. Golam Mortaza 
     December 2005.

3.  “Country Economic Report of Bangladesh”
     CACCI Journal, Vol. 2, 2004
     By The Federation of Bangladesh Chambers of Commerce and Industry.

4.  Working Paper Series: WP 0704, Bangladesh Bank
     “Sources of Inflation in Bangladesh: Recent Macroeconomic Experience”
     By M. Golam Mortaza
     December 2006.

5.  IMF working paper, IMF intitute
     “Exchange rate responses to inflation in Bangladesh”
     by Akhter Hossain , October 2002.

6.  “Inflation in Bangladesh: Supply Side Perspectives” 
     By Md. Alauddin Majumder 
     Policy Analysis Unit, Research Department, 
     Bangladesh Bank, November 2006.
    
7.  Asian development bank outlook –2007

8.  Newspapers – The daily Star, Financial express, the daily Jugantor.

9.  “Economics” 
      McConnell and Brue,
      International edition, 16th edition ,  McGraw- Hill.