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.

Description of the reasons:

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.

6) Supply Shortage:

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.