rticle on inflation


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i tried to search the reasons and policies to solve inflation

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rticle on inflation

  1. 1. The anatomy of food inflation and macroeconomic policies At the very beginning, I want to give an apology by saying that I am not an economist and the study that I completed here is not an expert one. In spite of that I, being a student of finance, have got an adequate amount of valor and firmness to make analysis and remark on current price hike situation, monetary and fiscal policies to face this situation. Let me also admit that I worked based on my modest intellectual capacity, information from a range of renowned newspapers and used a small number of reports as well. Today market has become a horrible place for people. The price of daily necessaries have skyrocketed .The real income of people is decreasing due to inflation as well as people are loosing job. As a result standard of living declining day by day .It has been a combat for people from middle class to cope up with pressurizing inflation situation. The tale of tragedy of lower class people is known by all of us more or less. Price of different commodities has become matter of anxiety for people from both middle class and lower class .No one wants to go to market despite having money. For the sake of survival everyone has to go to market twice or thrice in a week. They are buying rice, edible oil, wheat flour, pulses, onion, full cream milk powder,vegetables (potato, green chilli and brinjal), and egg,salt,sugar,chicken,fish and meat. Having gone to market they are being embarrassed by the price hike. Over the last two years, prices of rice, ata, lentil, soyabean oil, powdered milk, sugar and many other essential commodities have been increasing. The point-to-point inflation has crossed double digit level for the first time in this fiscal year which was rare in past decade. According to Bangladesh bureau of statistics inflation rate for February was 10.16percent.This rate in case of food was 12.72 percent. But most economists overruled that statistics. They said that the real inflation is close to 20percent at this moment. Any good which could be purchased at 100 in past, that can be purchased at 111 now. In other sense real income of 100 has reduced to 90 within a year. To what extent this inflation is increasing? There is a government firm to monitor market price called Trading Corporation of Bangladesh. But few agree with the report presented by that firm. But there is no other way. Price of commodities is being monitored by the information provided by that firm. Following Figure demonstrate that the economy has been experiencing a creeping inflation over the recent past. Most unique feature of this inflationary style had been increase in food Prices had been more than that of all-purpose item prices. These trends had adverse implications particularly for the poorest segments of the society, given that there has not been any tangible increase in their real income.
  2. 2. Inflation (point to point)2007-2008 16 14 12 10 general Rate 8 6 food 4 2 0 r ly ay ch r y y be be ar ar ju m ar em nu nu m m ve ja ja pt no se Period Source: Bangladesh bureau of statistics. Presence of restrictive business practices (e.g. syndication and hoarding) and other disruptive actions (e.g. deliberate supply shortages) have also been matter of concerns. While the market structures of essential goods – both domestically produced and imported ones – follow a complex structure, these are often characterized by oligopolistic trends. It also needs to be pointed out that a large part of the domestic price rise is underwritten by high global prices of food grains and inflationary trends in neighboring countries. The earlier exchange rate regime in Bangladesh was adjustable basket peg using a real effective exchange rate target. Given a nominal exchange rate, the corresponding real effective rate is estimated. Then it adopted floating exchange rate regime in which the nominal exchange rate is determined by the market forces of demand and supply of foreign exchange. Devaluation or fixing a rate lower than it would be in a free exchange market has been a key feature to stimulate export and discourage imports in a depressed economy like ours. Unfortunately, Bangladesh is an import based economy and depreciation of taka will make costs of imports shoot up, and as a penalty cost of our exports would also go up, making Bangladesh uncompetitive in the global market. The discussion of inflation in the context of exchange rate regime becomes relevant because of two major considerations. First a change in the exchange rate causes a change in the domestic prices of tradable .The prices of non tradable also likely to be effected. As a result, devaluation places an upward pressure in the inflation rate. An increased energy price is also likely to contribute to the spiral of food inflation in Bangladesh in the coming months. The government has recently increased the energy
  3. 3. prices in response to the soaring global prices. Prices of diesel and kerosene have been increased by 21 per cent from the April of this year only 10 months following previous adjustments. Higher fuel prices, especially the price of diesel which is commonly used in irrigation pumps have caused the production cost to rise significantly. Strict law enforcements by the joint forces and the eviction of many roadside markets are also likely to adversely affect the food inflation situation in Bangladesh. Demolition of local hat and bazars has not helped either. The phantom of price rises is in good spirits to strike people with horror. For this people are accountable by a large degree. People are expecting more than they should expect. They are forecasting inflation having a slight information and understanding. Recently inflation in price of stove and kerosene has been seen due to a declaration of gas supply will be stopped for three days. Hearing that people hurried to market to buy oil- burning stove, cook able food and kerosene. Suppliers took the chance and inflate the price of these commodities. Items Prior to declaration After declaration stove 100-150 300-350 kerosene 50/ kg 80/kg There is a famous theory in economics is that adaptive expectation theory. It holds that people tend to anticipate the rate of inflation based on their previous and current experience. According to theory: - Anticipation is less true and rate of inflation is more true. But the thing which is happening is that Anticipation is more true and rate of inflation is less true. It is being recommended that people should anticipate as rationally as possible. Price hike of essential commodities has been one of the prime challenges facing the Present Caretaker Government (CTG) of Bangladesh. Both the government and the central bank are now jointly working to ease inflationary pressure on economy. These joint effort include working against both economic and non-economic factors like failure to contain high inflationary pressure, electricity, gas, transport and other infrastructure constraints adversely affecting the country's productive performance; persistence of high and rising petroleum and food prices in the global market. The food price inflation came down to 12.92 per cent in March from 14.20 per cent in January on point-to-point basis, according to the Bangladesh Bureau of Statistics (BBS) date. Fight against inflation will continue to minimize its pressure on the economy. The economy has bounced back and it will get better in the future In recent months, the present CTG has taken a number of market-based and non-market measures to stabilize the rising prices. These measures ranged from fiscal measures (e.g. reduction of import tariff on certain commodities) to direct market interventions (e.g. opening sales outlets of daily essentials). The care taker government has decided to form
  4. 4. a core committee to monitor food prices; stock, supply .Government is also wants to wide OMS of rice. It is being apprehended that these proactive steps might get partly neutralized by the recent upward adjustment of fuel prices, and also market dislocation arising from removal of traders from unauthorized market places. Whatsoever, the markets of daily essentials have continued to rise revealing a significant gap between the farmgate price and the consumer price for similar products. Bangladesh bank advises government to build up emergency food stock. BB is releasing the US dollar to the commercial banks to settle import payment bills for essential items particularly food grains. A concerned remained about outlook for inflation underpinned by supply side constraints, political and strong aggregate demand. The Bangladesh bank has steadily intensified its intervention in the inter-bank foreign exchange market to help the banks settle their import bills for food grains, scrap vessels and gasoline. The central bank has started intervening in the inter-bank foreign exchange through selling us dollar since October 29 last year aiming to keep the market stable. The BB has since sold a total $472 million to the commercial banks as part of its intervention in the market according to the central bank statistics. The central bank is selling the greenback to the commercial banks. The central bank will continue to move on the basis of the market demand to help stability of the greenback. Recent Initiatives of the Government A. OMS initiatives at the GoB level. B. OMS initiatives at the private level. C. Withdrawal of Tariff. D. Draft Anti-hoarding Act. Our caretaker government is now considering a pay allowance for the government servants to help mitigate their financial difficulties due to the price spiral. Undoubtedly, the government servants would get some relief if their salaries were increased. But what about millions of underprivileged people of the country who are not government servants? They are working in various private establishments, mills, factories and engaging themselves in different types of works fetching a meager income. And again, it is observed and knowledgeable that whenever our government increased the pay of the government servants it had an unfavorable shock on the market and the prices of essential commodities further blast up. As the rate of inflation is the upshot of a multifaceted relationship of economic factors, hardly any elite answer exists to deal with the situation. However, the government may be well advised to focus in the short term on a set of price stabilization policies targeting a basket of essential products. In the medium term, the government may focus on increasing domestic production of daily essentials, mitigating their enhanced production costs and improving their productivity.
  5. 5. We trust our government will think about and take the following steps with a view to reducing the sufferings of the bulk who are vulnerably groaning under the weight of price hike of essential commodities: - 1. The government may officially identify certain food products as “Essential Commodities” and declare its intention to maintain stability of prices of such Commodities through policy and institutional interventions in greater public interest. 2. If possible, government should introduce zero tariffs for selected essential Commodities (currently zero import tariff has been provided for rice and wheat) particularly for the ones for which import price is high (e.g. Lentil). 3. Rates of duties and taxes on import of rice, ata, soybean oil, lentil, powered milk, sugar and other essential commodities may be reduced drastically and if possible totally withdrawn. 4. Rates of tariff on natural gas, electricity, water supply, railway tickets, municipal holding tax, government service charges, non-judicial stamps, postage stamps etc may be cut by 25 to 50 percent. There is a strong forecast about no chance of decline in price of commodities in near future. Moreover further increment is most possible. The government is expecting to increase the price of oil one step further after the passing Boro season. In addition to that price of gas will also increase. No exception will happen in case of electricity or fertilizer either. As a result the price of other product and service will also increase. But the light of hope is bumper harvest of boro. But possibilities of hazards can not be overruled. Nevertheless people are living in the state of optimism. Let us not charge flood or sidr. Floods are our regular attendant. Cyclones also revisiting us at an expected basis. The situation will get deteriorated with the changing world climate. We have got to create an available food supply with good storage. In that case well- organized allocation is also needed .We should rely and concentrate on our agricultural system more being an agricultural country. All authorities and forces should come forward to win that battle against food crisis and inflation. Let me conclude by quoting from Bernard Shaw” If all economists were laid end to end, they would not reach a conclusion”.