price inflation: a critical analysis on the impact of tumor on food pricing

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A Report on
Price inflation: a critical analysis on the impact
of tumour on food pricing

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Submitted To
Md. Asiqur Rahman
Lecturer
Depatment of Accounting & Information Systems
University of Barishal
Submitted By
Group-7
Group Profile
SL Name ID Number
01 Kamruzzaman Khan 16 AIS 018
02 Al-Mamun 16 AIS 014
03 Sirajul Islam 16 AIS 033
04 Sumaiya Akter 16 AIS 016
05 Mukta Khan 14 AIS 079
06 Rana Mridha 16 AIS 059
07 Syed Ruman Islam 13 AIS 078
08 Kamruzzaman 16 AIS 048

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Abstract
Inflation as measured by changes in the consumer price index (CPI) overstates
‘true’ increases in the cost of living due to a number of inherent conceptual
differences and measurement issues. Even so, other measures of the cost of
living have increased by a similar amount to the CPI over the past decade.
Measured inflation has been higher for some households and socio-economic
groups than for others, though the differences have generally not been large and
have tended to even out over time. Although cost-of-living inflation has been
moderate across most households, there are a number of reasons why some
households might have perceived inflation to be higher than it actually was.
Price inflation plays an important role in determining food pricing. Food pricing
and marketing practices are therefore an essential component of the eating
environment. Recent studies have applied economic theories to changing dietary
behaviour. Price reduction strategies promote the choice of targeted foods by
lowering their cost relative to alternative food choices. Two community-based
intervention studies used price reductions to promote the increased purchase of
targeted foods.

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What Is Inflation?
Inflation is a quantitative measure of the rate at which the average price level of
a basket of selected goods and services in an economy increases over a period
of time. It is the constant rise in the general level of prices where a unit of
currency buys less than it did in prior periods. Often expressed as a percentage,
inflation indicates a decrease in the purchasing power of a nation’s currency.
 Inflation is defined as a sustained increase in the general level of prices
for goods and services.
 For example, if the inflation rate is 2% annually, then theoretically a $1
pack of gum will cost $1.02 in a year. After inflation, our dollar can't buy
the same goods it could beforehand.
As prices rise, a single unit of currency loses value as it buys fewer goods and
services. This loss of purchasing power impacts the general cost of living for the
common public which ultimately leads to a deceleration in economic growth.
The consensus view among economists is that sustained inflation occurs when a
nation's money supply growth outpaces economic growth.
To combat this, a country's appropriate monetary authority, like the central
bank, then takes the necessary measures to keep inflation within permissible
limits and keep the economy running smoothly.
Inflation is measured in a variety of ways depending upon the types of goods
and services considered and is the opposite of deflation which indicates a
general decline occurring in prices for goods and services when the inflation
rate falls below 0%.
Types of Inflation based on causes
Rising prices are the root of inflation, though this can be attributed to different
factors. In the context of causes, inflation is classified into three types:
1. Demand-Pull inflation
2. Cost-Push inflation
3. Built-In inflation.

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What Is Demand-Pull Inflation?
Demand-pull inflation is the upward pressure on prices that follows a shortage
in supply. Economists describe it as "too many dollars chasing too few goods."
Demand-pull inflation is a tenet of Keynesian economics that describes the
effects of an imbalance in aggregate supply and demand. When the aggregate
demand in an economy strongly outweighs the aggregate supply, prices go up.
This is the most common cause of inflation.
Understanding Demand-Pull Inflation
The term demand-pull inflation usually describes a widespread phenomenon.
That is, when consumer demand outpaces the available supply of many types of
consumer goods, demand-pull inflation sets in, forcing an overall increase in the
cost of living.
Causes of Demand-Pull Inflation
There are five causes for demand-pull inflation:
 A growing economy. When consumers feel confident, they spend more
and take on more debt. This leads to a steady increase in demand, which
means higher prices.
 Asset inflation. A sudden rise in exports forces an undervaluation of the
currencies involved.
 Government spending. When the government spends more freely, prices
go up.
 Inflation expectations. Companies may increase their prices in
expectation of inflation in the near future.
 More money in the system. An expansion of the money supply with too
few goods to buy makes prices increase.
Demand-Pull Effect
Demand-pull inflation occurs when the overall demand for goods and services
in an economy increases more rapidly than the economy's production
capacity. It creates a demand-supply gap with higher demand and lower supply,
which results in higher prices. For instance, when the oil producing nations
decide to cut down on oil production, the supply diminishes. It leads to higher
demand, which results in price rises and contributes to inflation.

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 Demand – Pull Inflation
What Is Cost-Push Inflation?
Cost-push inflation occurs when overall prices increase (inflation) due to
increases in the cost of wages and raw materials. Higher costs of production can
decrease the aggregate supply (the amount of total production) in the economy.
Since the demand for goods hasn't changed, the price increases from production
are passed onto consumers creating cost-push inflation.
Understanding Cost-Push Inflation
The most common cause of cost-push inflation starts with an increase in the cost of
production, which may be expected or unexpected. For example, the cost of raw
materials or inventory used in production might increase, leading to higher costs.
Inflation is a measure of the rate of price increases in an economy for a basket of
selected goods and services. Inflation can erode a consumer's purchasing power if
wages haven't increased enough or kept up with rising prices. If a company's
production costs rise, the company's executive management might try to pass the
additional costs onto consumers by raising the prices for their products. If the

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company doesn't raise prices, while production costs increase, the company's profits
will decrease.
For cost-push inflation to take place, demand for the affected product must remain
constant during the time the production cost changes are occurring. To compensate for
the increased cost of production, producers raise the price to the consumer to maintain
profit levels while keeping pace with expected demand.
Causes of Cost-Push Inflation
As stated earlier, an increase in the cost of input goods used in manufacturing,
such as raw materials. For example, if companies use copper in the
manufacturing process and the price of the metal suddenly rises, companies
might pass those increase on to their customers.
Increased labour costs can create cost-push inflation such as when mandatory
wage increases for production employees due to an increase in minimum the
wage per worker. A worker strike due to stalled to contract negotiations might
lead to a decline in production and as a result, higher prices ensue for the scare
product.
Unexpected causes of cost-push inflation are often natural disasters, which can
include floods, earthquakes, fires, or tornadoes. If a large disaster causes
unexpected damage to a production facility and results in a shutdown or partial
disruption of the production chain, higher production costs are likely to follow.
A company might have no choice but to increase prices to help recoup some of
the losses from a disaster. Although not all natural disasters result in higher
production costs and therefore, wouldn't lead to cost-push inflation.
Other events might qualify if they lead to higher production costs, such as a
sudden change in government that affects the country’s ability to maintain its
previous output. However, government-induced increases in production costs
are more often seen in developing nations.
Government regulations and changes in current laws, although usually
anticipated, may cause costs to rise for businesses because they have no way to
compensate for the increased costs associated with them. For example, the
government might mandate that healthcare be provided, driving up the cost of
employees or labour.
Cost-Push Effect
Cost-push inflation is a result of the increase in the prices of production process
inputs. Examples include an increase in labour costs to manufacture a good or
offer a service or increase in the cost of raw material. These developments lead
to higher cost for the finished product or service and contribute to inflation.

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Cost – Push Inflation
Built-In Inflation
Built-in inflation is the third cause that links to adaptive expectations. As the
price of goods and services rises, labour expects and demands more costs/wages
to maintain their cost of living. Their increased wages result in higher cost of
goods and services, and this wage-price spiral continues as one factor induces
the other and vice-versa
Theoretically, monetarism establishes the relation between inflation and money
supply of an economy. For example, following the Spanish conquest of the
Aztec and Inca empires, massive amounts of gold and especially silver flowed
into the Spanish and other European economies. Since the money supply had
rapidly increased, prices spiked and the value of money fell, contributing to
economic collapse.

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Causes of inflation
 Excess money supply
Inflation is always and everywhere a monetary phenomenon Low interest rates
correspond with a high level of money supply MV = PQ
 Unemployment
There is an inverse relation between rate of inflation and the rate of
unemployment in an economy
Costs of Inflation
There are many costs associated with inflation; the volatility and uncertainty
can lead to lower levels of investment and lower economic growth. For
individuals, inflation can lead to a fall in the value of their savings and
redistribute income in society from savers to lenders and those with assets. At
extreme levels, inflation can destabilise society and destroy confidence in the
economic system.

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Explaining the costs of inflation
— Creditors lose and debtors gain if the lender does not anticipate inflation
correctly. Uncertainty about what will happen next makes corporations and
consumers less likely to spend. People living off a fixed-income, such as
retirees, see a decline in their purchasing power and, consequently, their
standard of living. The entire economy must absorb reprising costs as menu
costs. If the inflation rate is greater than that of other countries, domestic
products become less competitive.
1. Reduced international competitiveness
If a country has a relatively higher inflation rate than its trading partners, then
its exports will become less competitive, leading to a fall in exports and a
deterioration in the UK current account. This is particularly a problem for a
country in a fixed exchange rate. For example, countries in the Euro, such as
Greece, Ireland and Spain experienced higher inflation than northern Eurozone,
leading to record current account deficits (over 10% of GDP in 2007. The
uncompetitiveness also caused a fall in economic growth
 However, if a country is in a floating exchange rate – then the high
inflation can be offset by a depreciation in the currency. Though this still
has an economic cost as it is a decline in the terms of trade and more
expensive imports.
2. Confusion and uncertainty
When inflation is high, people are more uncertain about what to spend their
money on. Also, when inflation is high, firms are usually less willing to invest –
because they are uncertain about future prices, profits and costs. This
uncertainty and confusion can lead to lower rates of economic growth over the
long term. This is one of the main concerns about high inflation rates. Countries
with low and stable inflation rates – tend to have improved economic
performance over countries with higher inflation.
3. Menu costs
This is the cost of changing price lists. When inflation is high, prices need
frequently changing which incurs a cost.
 However, modern technology has helped to reduce this cost.
4. Shoe leather costs

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To save on losing interest in a bank people will hold less cash and make more
trips to the bank.
5. Income redistribution
Inflation will typically make borrowers better off and lenders worse off.
Inflation reduces the value of savings, especially if the savings are in the form
of cash or bank account with a very low-interest rate. Inflation tends to hit older
people more. Often retired people rely on the interest from savings. High
inflation can reduce the real value of their saving and real incomes.
6. Cost of reducing inflation
High inflation is deemed unacceptable therefore governments / Central Bank
feel it is best to reduce it. This will involve higher interest rates to reduce
spending and investment. This reduction in Aggregate Demand (AD) will lead
to a decline in economic growth and unemployment. Inflation is reduced, but
there is a cost to other macro-economic objectives. Therefore, it is better to keep
inflation low and avoid later more costly efforts to reduce it.
7. Fiscal drag
The amount of tax we pay increases if there is inflation. This is because with
rising wages more people will slip into the top income tax brackets.
How is Inflation Measured?
Inflation is an increase in the level of prices of the goods and services that
households buy. It is measured as the rate of change of those prices. Typically,
prices rise over time, but prices can also fall (a situation called deflation).
The most well-known indicator of inflation is the Consumer Price Index (CPI),
which measures the percentage change in the price of a basket of goods and
services consumed by households.
In Australia, the CPI is calculated by the Australian Bureau of Statistics (ABS)
and published once a quarter. To calculate the CPI, the ABS collects prices for
thousands of items, which are grouped into 87 categories (or expenditure
classes) and 11 groups. Every quarter, the ABS calculates the price changes of
each item from the previous quarter and aggregates them to work out the
inflation rate for the entire CPI basket.
Calculating Inflation – An Example
To better understand how inflation is calculated we can use an example. In this
example we calculate inflation for a basket that has two items in it – books and
childcare. The formula for calculating inflation for a single item is below.

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The price of a book was $20 in 2016 (year 1) and the price increased to $20.50
in 2017 (year 2). The price of an hour of childcare was $30 in 2016, and this
increased to $31.41 in 2017.
Items 2016 2017 Inflation
$20 $20.50 2.5%
$30 $31.41 4.7%
Using the formula, inflation for each of the individual items can be calculated.
 For books, annual inflation was 2.5 per cent
 For childcare, annual inflation was 4.7 per cent
To calculate inflation for a basket that includes books and childcare, we need to
use the CPI weights that are based on how much households spend on these
items. Because households spend more on childcare than books, childcare has a
greater weight in the basket. In this example, childcare accounts for 73 per cent
of the basket and books account for the remaining 27 per cent. Using these
weights, and the change in prices of the items, annual inflation for this basket
was 4.1 per cent – calculated as (0.73 x 4.7) + (0.27 x 2.5).

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Consumer Price Index (CPI):
—
Limitations of the CPI
CPI is not an indicator of the price level
The CPI measures the rate of price changes in the economy, but not the price
level. If the price index of bread is 140 and the price index of eggs is 180, it
does not mean that eggs are more expensive than bread. It only means that the
price of eggs has increased by more than the price of bread from a particular
point in time.
Coverage
For practical reasons, the CPI measures price changes of items in the
metropolitan areas of Australia's eight capital cities (where around two thirds of
Australian households live). It does not measure price changes in regional, rural
or remote areas. The CPI also does not take into account the differences in
spending patterns between individual households. Households are very different
and some may spend a lot more on a certain items than others. For example,
cars have a weight of almost 3 per cent in the CPI basket, but not every
household owns a car.
—Producer Price Indexes (PPI)
The PPI indicates changes in producer prices of
locally produced commodities including exports.

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Quality changes
The CPI intends to only calculate pure price changes. This means the CPI
should ignore price changes that result from variations in the quality of items.
The quality of items in the basket can vary and new products can be introduced.
For example, a bag of pasta can become smaller in weight, or the quality of a
mobile phone can improve if its camera is upgraded.
The ABS tries to remove any price changes that result from changes in quality
or the mix of items that households buy. Continuing with the previous
examples, the ABS would calculate the price of the pasta assuming that the
weight remained the same, and compare it with the price in the previous quarter.
Calculating the increase in the price of a mobile phone due to the improved
camera is more difficult, because there is often limited information about how
much the price of the phone has changed because of the better camera. In this
case, the ABS would need to estimate the price impact of the improved camera
and adjust the mobile phone price. Because the adjustment is only an estimate,
it can result in under or overestimation of the pure price change. Services are
particularly difficult to quality-adjust because changes often occur slowly and it
is hard to measure by how much the service has improved. For example, better
x-ray technology at a hospital could better detect injuries, but it is difficult to
calculate how much the improvement in detecting injuries is worth. In those
cases, it can lead to quality being only partly accounted for or not at all.
Substitution bias
The CPI is affected by ‘substitution bias’. This is because the CPI does not
adjust for changes in household spending patterns very often (as identifying
such changes for all households is a major undertaking). In reality, households
frequently change the amounts they spend on items. For example, if lamb prices
rise by more than beef prices, households might adapt and buy more beef and
less lamb. Not accounting for this type of substitution in expenditure results in
too much weight being given to lamb in the CPI basket and too little weight
given to beef. This increases (or biases) the CPI compared with an index that
accounts for households substituting from relatively more expensive items to
relatively cheaper ones. In the past, updates to the CPI basket have taken place
every 5 or 6 years, and from late 2017 onwards, the ABS started updating the
CPI weights on an annual basis, which will help reduce the substitution bias in
the CPI.

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New products
The CPI does not include new products as soon as they appear on the market. It
can often take some time until the ABS includes them in the CPI basket. This
typically occurs once a product has reached a high enough market share and is
available to most households.
Cost of living
The CPI is often used to measure changes in the cost of living, but it is not an
ideal indicator of this. While the CPI measures price changes, cost of- living
inflation is the change in spending by households required to maintain a given
standard of living. The ABS publishes other indexes that aim to provide a better
indicator of the cost of living.
The Inflation situation in Bangladesh:
Bangladesh inflation rate for 2018 was 5.54%, a 0.16% decline from 2017
.Bangladesh inflation rate for 2017 was 5.70%, a 0.19% increase from 2016.
Bangladesh inflation rate for 2016 was 5.51%, a 0.68% decline from 2015.
Bangladesh inflation rate for 2015 was 6.19%, a 0.8% decline from 2014.
Bangladesh inflation rate eased to 5.57 per cent in January of 2020 from 5.75
per cent in the previous month. Food prices advanced at a softer pace
(5.12percent vs. 5.88 per cent in December) while non-food products cost rose
faster (6.30 per cent vs. 5.55 per cent). The inflation rates for rural and urban
areas were 5.52 per cent and 5.67 per cent, compared with December's figures
of 5.76 per cent and 5.73 per cent respectively. On a monthly basis, consumer
prices rose 1.17 per cent, after decreasing 0.23 per cent in the previous month.

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The recent inflation situation in Bangladesh:
Food
Food is any substance[1] consumed to provide nutritional support for an
organism. Food is usually of plant or animal origin, and contains essential
nutrients, such as carbohydrates, fats, proteins, vitamins, or minerals. The
substance is ingested by an organism and assimilated by the organism's cells to
provide energy, maintain life, or stimulate growth.
Historically, humans secured food through two methods: hunting and gathering
and agriculture, which gave modern humans a mainly omnivorous diet.
Worldwide, humanity has created numerous cuisines and culinary arts,
including a wide array of ingredients, herbs, spices, techniques, and dishes.
Today, the majority of the food energy required by the ever-increasing
population of the world is supplied by the food industry. Food safety and food
security are monitored by agencies like the International Association for Food
Protection, World Resources Institute, World Food Programme, Food and
Agriculture Organization, and International Food Information Council. They

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address issues such as sustainability, biological diversity, climate change,
nutritional economics, population growth, water supply, and access to food.
Non-food
Non-food items (NFIs) are items other than food. The term is especially used in
humanitarian contexts, when providing NFIs to those affected by natural
disasters or war may be a life-saving priority. Typically, they include essential
household items such as blankets, food plastic sheets, buckets and other
containers for water, cooking items and soap.[1]
Inflation of food & non – food :
When food prices rise, it is called food inflation. Food inflation is caused
because of short term supply constraint such as bad weather, increased use of
bio – fuels, rising demand. In 2016, food inflation increased to 3.89 percent in
March from 3.77 percent in February last. Since prices of some commodities
increased compared to those of the previous month. Monthly non – food
inflation rate dropped to 8.36 percent in March from 8.46 percent in February.
The inflation in urban & rural area :
The inflation rate in rural & urban area is different. Because of different basket
of products, growth rate or income rate are different. In 2016, inflation rate in
urban area was 7.22 percent in February. Inflation rate increased to 7.27 percent
in March from 7.22 percent in February. One the other hand inflation rate in
rural area was 4.76 percent in February. Inflation rate increased to 4.76 percent
in March from 4.76 percent in February. Overall inflation increased 0.05
percent points to 7.27 percent in March compared to February. In rural area
overall inflation increased 0.03 percent points to 4.79 percent in March
compared to the previous month.
Food inflation in urban & rural area :
Food inflation rate is also different In urban & rural area. Rice & vegetables
prices are lower in rural area. These prices are higher in urban areas because of

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transportation & other costs. In 2016, inflation rate of food in urban area was
5.48 percent in February. These inflation rate increased to 5.61 percent in
March. One the other hand food inflation rate in rural area was 3.04 percent in
February. These rate increased to 3.15 percent in March compared to February.
Food inflation rate in urban area increased by 0.13 percent points in March last
from 5.48 percent in February. Food inflation rates accelerated faster in urban
than in rural areas.
Non-Food inflation in urban and rural area
In October, non-food inflation in both urban and rural areas declined to 6.09 per
cent and 4.94 per cent respectively from that of 6.61 per cent and 5.42 per cent a
month ago. Food inflation in urban and rural areas increased to 5.31 per cent
and 5.56 per cent respectively in October.
General Effects Of Inflation :
Inflation tends to increase the aggregate money income (i.e., national income)
of the community as a whole on account of larger spending and greater
production. Similarly, the volume of employment increases under the impact of
increased production.
The following points highlight the six major effects of inflation. The effects
are:
 Effects on Distribution of Income and Wealth

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 Effects on Production
 Effects on Income and Employment
 Effects on Business and Trade
 Effects on the Government Finance
 Effects on Growth.
 Purchasing power.
 Uneven effect distribution of inflation in economy.
 Effect on real value.
1.Effects on Distribution of Income and Wealth :
The impact of inflation is felt unevenly by the different groups of individuals
within the national economy—some groups of people gain by making big
fortune and some others lose.
We may now explain in detail the effects of inflation on different groups of
people:
(a) Creditors and debtors:
During inflation creditors lose because they receive in effect less in goods and
services than if they had received the repayments during a period of low prices.
Debtors, on other hand, as a group gain during inflation, since they repay their
debts in currency that has lost its value (i.e., the same currency unit will now
buy less goods and services).
(b) Producers and workers:
Producers gain because they get higher prices and thus more profits from the
sale of their products. As the rise in prices is usually higher than the increase in
costs, producers can earn more during inflation. But, workers lose as they find a
fall in their real wages as their money wages do not usually rise proportionately
with the increase in prices. They, as a class, however, gain because they get
more employment during inflation.

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(c) Fixed income-earners:
Fixed income-earners like the salaried people, rent-earners, landlords,
pensioners, etc., suffer greatly because inflation reduces the value of their
earnings.
(d) Investors:
The investors in equity shares gain as they get dividends at higher rates because
of larger corporate profits and as they find the value of their shareholdings
appreciated. But the bondholders lose as they get a fixed interest the real value
of which has already fallen.
(e) Traders, speculators, businesspeople and black-marketers:
They gain because they make more profits from the persistent rise in prices.
(f) Farmers:
Farmers also gain because the rise in the prices of agricultural products is
usually higher than the increase in the prices of other goods.
Thus, inflation brings a shift in the pattern of distribution of income and wealth
in the country, usually making the rich richer and the poor poorer. Thus during
inflation there is more and more inequality in the distribution of income.
2. Effects on Production:
The rising prices stimulate the production of all goods—both of consumption
and of capital goods. As producers get more and more profit, they try to produce
more and more by utilising all the available resources at their disposal.
But, after the stage of full employment the production cannot increase as all the
resources are fully employed. Moreover, the producers and the farmers would
increase their stock in the expectation of a further rise in prices. As a result
hoarding and cornering of commodities will increase.
But such favourable effects of inflation upon production are not always found.
Sometimes, production may come to a standstill position despite rising prices,
as was found in recent years in developing countries like India, Thailand and
Bangladesh. This situation is described as stagflation.

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3. Effects on Income and Employment:
Inflation tends to increase the aggregate money income (i.e., national income)
of the community as a whole on account of larger spending and greater
production. Similarly, the volume of employment increases under the impact of
increased production. But the real income of the people fails to increase
proportionately due to a fall in the purchasing power of money.
4. Effects on Business and Trade:
The aggregate volume of internal trade tends to increase during inflation due to
higher incomes, greater production and larger spending. But the export trade is
likely to suffer on account of a rise in the prices of domestic goods. However,
the business firms expand their businesses to make larger profits.
During most inflation since costs do not rise as fast as prices profits soar. But
wages do not increase proportionate with prices, causing hardships to workers
and making more and more inequality. As the old saying goes, during inflation
prices move in escalator and wages in stairs.
5. Effects on the Government Finance:
During inflation, the government revenue increases as it gets more revenue from
income tax, sales tax, excise duties, etc. Similarly, public expenditure increases
as the government is required to spend more and more for administrative and
other purposes. But the rising prices reduce the real burden of public debt
because a fix sum has to be paid in instalment per period.
6. Effects on Growth:
A mild inflation promotes economic growth, but a runaway inflation obstructs
economic growth as it raises cost of development projects. Although a mild
dose of inflation is inevitable and desirable in a developing economy, a high
rate of inflation tends to lower the growth rate by slowing down the rate of
capital formation and creating uncertainty.
Purchasing Power
Purchasing power is the value of a currency expressed in terms of the amount of
goods or services that one unit of money can buy. Purchasing power is
important because, all else being equal, inflation decreases the amount of goods
or services you would be able to purchase.

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In investment terms, purchasing power is the dollar amount of credit available
to a customer to buy additional securities against the existing marginable
securities in the brokerage account. Purchasing power may also be known as a
currency's buying power.
Understanding Purchasing Power
Inflation reduces the value of a currency's purchasing power, having the effect
of an increase in prices. To measure purchasing power in the traditional
economic sense, you would compare the price of a good or service against a
price index such as the Consumer Price Index (CPI). One way to think about
purchasing power is to imagine if you made the same salary as your grandfather
40 years ago. Today you would need a much greater salary just to maintain the
same quality of living. By the same token, a homebuyer looking for homes 10
years ago in the $300,000 to 350,000 price range had more options to consider
than people have now.
Purchasing power affects every aspect of economics, from consumers buying
goods to investors and stock prices to a country’s economic prosperity. When a
currency’s purchasing power decreases due to excessive inflation, serious
negative economic consequences arise, including rising costs of goods and
services contributing to a high cost of living, as well as high interest rates that
affect the global market, and falling credit ratings as a result. All of these factors
can contribute to an economic crisis.
As such, a country’s government institutes policies and regulations to protect a
currency’s purchasing power and keep an economy healthy. One method to
monitor purchasing power is through the Consumer Price Index. The U.S.
Bureau of Labour Statistics (BLS) measures the weighted average of prices of
consumer goods and services, in particular, transportation, food and medical
care. The CPI is calculated by averaging these price changes and is used as a
tool to measure changes in the cost of living, as well as considered a marker for
determining rates of inflation and deflation.
A concept related to purchasing power is purchasing price parity (PPP). PPP is
an economic theory that estimates the amount that needs to be adjusted to the
price of an item, given two countries’ exchange rates, in order for the exchange
to match each currency’s purchasing power. PPP can be used to compare

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countries’ income levels and other relevant economic data concerning the cost
of living, or possible rates of inflation and deflation.
Effect on real value
Basically, inflation is caused by a rise in the price of goods or services. Now,
that is driven by supply and demand. A rise in demand can push prices higher,
while a supply reduction can also drive prices.
Demand can rise because consumers have more money to spend. More spending
increases inflation, in particular, higher consumer confidence. When wages are
steady or rising, and unemployment is relatively low, inflation is likely to rise.
As well, manufacturers are likely to raise prices if consumers are willing, or
capable, of spending more.
Then there’s the supply side. Lower supply can drive down demand, pushing
prices higher. A decline in supply can happen for a number of reasons, such as
disasters that disrupt the supply chain or manufacturers’ capabilities. Or
assuming an item turns out to be very popular, it can sell out quickly, such as
the case with iPhones
Positive Effects Of Inflation :
The public is always averse to a rise in prices - in many countries, people often
blame the government as being inefficient to control prices.
So, apparently inflation has little direct benefits; but indirectly it has some
positives:
But it all depends on the nature of the factor that has caused inflation:
Rise in demand : If price rise is due to a new demand stimulation in the
market, it indicates a good sign for the businesses - which would now
love to capture the new demand and increase their supply accordingly in
the long run.
Fiscal Deficit: Govt. spends a lot of money on creation of infrastructure
projects -causing high fiscal deficit and inflation. Now, these
developmental projects are costly but they provide essential economic
returns in the long run. Development of roads, railways, trade corridors
always boost economic growth.

24 | P a g e
Manageable inflation is ok: If inflation range is normal and predictable, it
does not harm anyone - because the wages, returns are accordingly
adjusted as per the inflation estimates. Problem only happens when
inflation goes out of control. So, increased income compensates inflation.
Side effect of growth : Most often, inflation is noticed as a side effect of
fast economic growth. The income of people rises → demand rises →
price rises → Inflation happens
But inflation can have numerous other causes, which may be more harmful than
useful to the economy. A stable and manageable rate of inflation is essential for
economic growth.
Being too strict on inflation can turn counter productive and plunge the
economy into a recession or depression, which is even worse.
Negative effects of inflation
The negative effects of inflation include an increase in the opportunity cost of
holding money, uncertainty over future inflation which may discourage
investment and savings, and if inflation were rapid enough, shortages of goods
as consumers begin hoarding out of concern that prices will increase in the
future.
 Cost-push inflation: Cost-push inflation occurs when overall prices
increase (inflation) due to increases in the cost of wages and raw
materials. Higher costs of production can decrease the aggregate
supply (the amount of total production) in the economy. Since the
demand for goods hasn't changed, the price increases from production are
passed onto consumers creating cost-push inflation.
 Hoarding: Hoarding is the purchase of large quantities of a commodity by
a speculator with the intent of benefiting from future price increases. It is
possible for hoarding to create a cycle of speculation, self-fulfilling

25 | P a g e
prophecies, and inflation. ... In the long run, investing in stocks has
outperformed hoarding commodities
 Hyperinflation: hyperinflation is very high and typically accelerating
inflation. It quickly erodes the real value of the local currency, as the
prices of all goods increase. This causes people to minimize their
holdings in that currency as they usually switch to more stable foreign
currencies, often the US Dollar.
What is food.
Food is any substance consumed to provide nutritional support for the body. It
is usually of Plant or Animal origin, and containsessential nutrients, such as
carbohydrates, fats, proteins, vitamins, or minerals
Food Sources: 1-Plants 2- Animals
a)-Plants: i-Staple Food ( Cereals/grains i.e maize, wheat, barley and rice etc.
ii-Seeds, iii-Fruits, iv- vegetable)
b)-Animal Food: i- Meat/Fish, ii-Dairy product, iii-Eggs, iv- Honey
How much Food is required for an individual?
The amount of grains, protein, vegetable and fruits you need to eat depends on
your age, sex, and level of physical activity.
Relationship between price inflation and food pricing
 One effect of higher food prices in a given country is higher
consumer price index(CPI) inflation. However, higher food prices affect
people in different economies differently. ... In short, higher food
prices don't hurt everyone equally. Poorer, developing economies feel it
much worse.
 Country like BD will face more than developed country
Impact of price hike in food stuff
There is growing consensus that food prices have increased due to fundamental
shifts in global supply and demand. A variety of forces contribute to rising food
prices: high energy prices, increased income, climate change and the increased

26 | P a g e
production of biofuel. Income and per capita consumption in developing
countries has increased; consequently, demand has also risen. Biofuel policies
adopted in developed countries also explain the growth in demand.
Furthermore, the food supply has not increased sufficiently at a time when grain
reserves are declining and land and water availability for food production has
decreased. Changes in food supply and demand have been accompanied by
predictable effects in terms of pricing and have been further affected by the rise
in the cost of non-renewable resources. In light of the above, the combination of
factors driving up food prices has led to a growing consensus that this increase
is a structural rather than a cyclical phenomenon.
Household buying power Pakistanis spend a little under half of their income
on food, about $7 per person per week: (43% of their
income)
Food quality compromised Average monthly consumption on food and
beverages dropped to 45.1%, as against 48.9% in
the preceding year
Education Parents are forced to make hard decisions regarding
daily expenditures, including educational expenses.
Households spend less than 4 percent of their total
expenditures on education, which translates into 6-7
percent of their non- food expenses.
Health Care Reduced expenditures on health lead to less adequate
treatment of disease and higher morbidity and
mortality rates
GDP Growth lesser demand in commodities slow the production
and ultimately the GDP growth went down to 3.59%
from 4.36 in from preceding year.

27 | P a g e
Long-Term Policies to Control Inflation
Labour Market Reforms
The weakening of trade union power, the growth of part-time and temporary
working along with the expansion of flexible working hours are all moves that
have increased flexibility in the labour market. If this does allow firms to
control their labour costs it may reduce cost push inflationary pressure.
Certainly in recent years the UK economy has not seen the acceleration in wage
inflation normally associated with several years of sustained economic growth
and falling inflation. One reason is that rising job insecurity inside a flexible
labour market has tilted the balance of power away from employees towards
employers.
Supply Side Reforms
If a greater output can be produced at a lower cost per unit, then the economy
can achieve sustained economic growth without inflation. An increase in
aggregate supply is often a key long term objective of Government economic
policy. In the diagram below we see the benefits of an outward shift in the short
run aggregate supply curve. The equilibrium level of real national income
increases and the average price level falls.
Supply side reforms seek to increase the productive capacity of the economy in
the long run and raise the trend rate of growth of labour and capital
productivity. A number of supply-side policies have been introduced into the
British economy in recent years. Productivity gains help to control unit labour
costs (an important cause of cost-push inflation) and put less pressure on
producers to raise their prices.
The key to controlling inflation in the long run is for the authorities to keep
control of aggregate demand (through fiscal and monetary policy) and at the
same time seek to achieve improvements to the supply side of the economy. The
credibility of inflation control policies can often be enhanced by the
introduction of inflation targets.

28 | P a g e
Short-Term Policies to Control Inflation
a. Monetary policy
b. Fiscal policy
i. Direct tax increase
ii. Decrease in PSNCR
 Direct wage controls
Monetary policy is the macroeconomic short-term policy laid down by the
central bank. It involves management of money supply and interest rate and is
the demand side economic policy used by the government of a country to
achieve macroeconomic objectives like inflation, consumption, growth and
liquidity.
Fiscal policy is based on the theories of British economist John Maynard
Keynes, which hold that increasing or decreasing revenue (taxes) and
expenditures (spending) levels influence inflation, employment and the flow of
money through the economic system. Fiscal policy is often used in combination
with monetary policy, which, in the United States, is set by the Federal Reserve
to influence the direction of the economy and meet economic goals.
The success of the economy is commonly measured by a few factors, including
gross domestic product (GDP), which is the value of goods and services
produced by a nation within a year. Another factor is aggregate demand, which
is the sum of goods and services produced by a nation purchased at a certain
price point. The aggregate demand curve dictates that at lower price levels,
more goods and services are demanded, while there is less demand at higher
price points.
i. Direct tax increase
ii. Decrease in PSNCR

29 | P a g e
PSNCR: The Public Sector Net Cash Requirement (PSNCR), formerly known
as the Public Sector Borrowing Requirement (PSBR), is the official term for the
Government budget deficit in the United Kingdom, that is to say the rate at
which the British Government must borrow money in order to maintain its
financial commitments.
Conclusion:
Inflation was there always and it will be but the fact is the inflation should be
controlled it should be kept in a limit. The government of Bangladesh should
take necessary steps to keep it under control. Between the two mitigation
techniques Bangladesh Government should keep its eye on the underlying
reasons behind inflation. Bangladesh can mitigate the rising food price if
Government can take necessary steps in increasing the production of food
grains in Bangladesh. Bangladesh Govt. also has to increase employment
facility by increasing the number of investment in production sector. If more
industrialization can be occurred then the GDP will increase and the inflation
will be mitigated. Bangladesh bank and also use the monetary weapons that
they have over inflation. So, controlling of inflation for short term is not what
our country needs to emphasize rather the long-term solution is needed.

30 | P a g e
References:
 www.wikipedia.org
 www.assignmentpoint.com
 www.researchgate.net
 www.alanpedia.com
 www.worldbank.org
 economictimes.indiatimes.com
 www.goole scholer.com

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