#resilience_nislam

Causes of inflation and its effect on consumers

INFLATION is the biggest financial problem and challenge not only in Bangladesh, but also in many other
countries. Inflation in the US, the largest economy, is now at 9.1 per cent, the highest in 40 years.
Theoretically inflation occurs for two reasons: an increase in demand and in cost of production. After the
shock of the Covid epidemic subsided, demand jumped as global economic activity began to normalize from
last January. But due to supply shortages and low production, global inflation has been on the rise since then.
Then on February 24, when Russia attacked Ukraine, there was a severe energy crisis and production costs
increased further. Again, the economic sanctions against Russia reduced the global supply of food grains
including wheat. As a result, inflation has touched in the world at the same time due to demand (demand
pull) and production cost increase (cost push), which have not been seen before in history.

Economists consider inflation as the biggest foe of the economy. Because inflation reduces people’s
purchasing power, increases the suffering of low- and fixed-income people. Although inflation has increased
gradually in Bangladesh since last January, the rate of increase in the last three months is unbearable.
Economists say inflation between 2 and 5 per cent is comfortable, but from 7 to 10 per cent is dangerous and
more than that is catastrophic. Bangladesh has already entered the danger zone. Inflation means a rising cost
of living. Especially for people with limited income, it is difficult to survive in high inflation. Inflation
exceeded 7 per cent in May and it increased further in June. The official inflation rate of the country is now
7.56 per cent. Some independent studies, however, put the figure much higher than the official rate.

Inflation in economics generally refers to an increase in the money supply. Inflation occurs when the supply
of money in an economy increases and the supply of goods and services remain unchanged. This increases
both the demand and the price level. Inflation, both classically and lexically, means a continuous increase in
the prices of all kinds of goods and services, usually caused by an excess money supply, which results in a
decrease in the value of money. But if there is an increase in the price of only one, two or few goods or
services, then it is not called inflation. Inflation is said to occur when the prices of goods and services
increase overall. For example, it can be said that in the wake of the Russia-Ukraine war in 2022, the price of
crude oil in the global market has increased almost all the commodities around the world. This has generated
inflation.

Inflation can also be defined in another way. If the purchasing power of a currency decreases, then the
situation is also called inflation. For example, in 2012, the price of 1 kilogram of rice was Tk 25, while in
2022, the price was Tk 50. In other words, the amount of rice that was available for Tk 25 in 2012, today in
2022, less amount of rice is available for the same amount of money. This means that the currency’s power
or its value has depreciated, resulting in inflationary conditions.

Inflation usually occurs for two reasons. First, demand-driven inflation — in this case, if the demand for
goods and services increases in a country without having corresponding supply of goods or services, then the
prices of those goods and services that are sufficient increase and create inflationary conditions. We know
that if a commodity is in short supply but in high demand, the price of that commodity will rise. Such
inflationary conditions can be created if the government lowers income taxes or lowers interest rates, or
raises employee wages. Secondly, inflation occurs due to price increase. In this case, if the price of raw
Nazmul Islam, BBA, MBA(Accounting)
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materials or those goods or services on which the economy of a country is heavily dependent increases, then
inflation occurs. For example, if the price of petrol or diesel increases, prices of products that ultimately
reaches the consumer through vehicles run on petrol or diesel increase too. Other causes of inflation are
increase in money supply, decrease in production, increase in cost of production, inadequate power supply,
natural calamities, wars and epidemics, increase in travel and transportation costs, hoarding and smuggling,
population growth, liberal credit policy, political instability, etc.

Inflation accelerates income inequality in society, creates social discontent and creates an unstable economy.
So, to control inflation, the government mainly takes two types of measures — monetary policy and fiscal
policy. As monetary policy, the central bank tries to reduce the amount of money created by selling
government bonds in the open market, by increasing the rate at which the central bank lends money to the
commercial banks to control the money supply and may increase the cash deposit ratio or reserve for
commercial banks. Fiscal policy, on the other hand, is much more effective than monetary policy in
controlling inflation as per the current economic system. One of the causes of inflation is overspending.
During times of inflation, the government may reduce spending on unproductive sectors. Again, the
government can reduce the disposable income of the people by increasing the level of taxes imposed on the
people or imposing new taxes to control the inflation caused by the increase in demand. Governments can
subsidies production if the economy experiences inflation due to increased consumption or inflation due to
reduced production. On the other hand, in times of domestic debt-inflation, the government can borrow from
individuals, institutions and banks within the country.

Controlling hyperinflation has now emerged as a major challenge for the economy. Inflation has increased
consistently for the past five months. It was below 6 per cent last January. It crossed 6 per cent in February,
and since then the rate of inflation has been increasing continuously. However, economists believe that the
actual inflation rate is higher than 7.56 per cent. The pressure of this inflation is more than 10 per cent,
especially on the poor people.

The prices of daily commodities have continuously increased in the market for several months. As a result,
the poor and low-income people are suffering. Due to these reasons, inflation has become a headache for the
common consumers for several months.

According to BBS data, at the end of last June, food inflation increased to 8.37 per cent while non-food
inflation was 6.08 per cent. Moreover, the BBS data show that inflation is higher in rural areas than in urban
areas. Inflation in rural areas rose to 8.09 per cent in June and inflation in urban areas was 6.62 per cent.
According to the same data, food inflation in rural areas reached 8.93 per cent in June. In urban areas, this
rate is 7.11 per cent.

Inflation is like a burden or a tax. If wages or income does not increase in line with the increase in the prices
of goods, people’s real purchasing power decreases. As a result, many people who are slightly above the
poverty line become vulnerable. According to the BBS, national wage growth was 6.38 per cent last June
over the base year 2010–11, which is lower than headline inflation. In other words, wages are not increasing
at the same rate as the prices of goods are increasing. As a result, people’s real purchasing power has
decreased.

Nazmul Islam, BBA, MBA(Accounting)

Besides, as a result of the increase in fuel oil prices in the country last November, inflation exceeded 6 per
cent in December. However, in January it again fell below 6 per cent. Then the Ukraine-Russia war broke out
in the last week of February, fuelling inflation a bit further. Inflation rose again to 6 per cent. The ongoing
dollar crisis for the last three months has left the import system in turmoil. Overall import costs for importers
have increased. As a result, inflation has risen above 7 per cent in May and June.

Meanwhile, due to the upward trend of inflation for the last six months, the inflation target for the last
financial year was fixed at 5.4 per cent. But in the fiscal year 2021–22, there has been an average inflation of
6.15 per cent. This means that the inflation target is not correct. The finance minister said that inflation will
be kept at 5.6 per cent in the ongoing financial year.

However, whatever the government says, the low-income people face the most hardship due to an increase in
commodity prices. Therefore, to protect their interests, the supply of daily necessities must be ensured. The
government should have full control over the market. In order to keep the wheels of the economy moving, it
is necessary to control the rise in commodity prices. All visible and invisible syndicates must be broken and
the right and security of the common and low-income people must be ensured.

Nazmul Islam, BBA, MBA(Accounting)