In macroeconomics, inflation is a much known term. Generally, Inflation denotes a sustained increase in the general level of price. During the inflation period the price of goods and services go up and the people will tend to buy less goods and services. Many people think that inflation makes them poorer than before because it raises the cost of what they buy. From the view point of macroeconomics, in Bangladesh the inflation rate is a bit unstable. An overview situation of inflation in Bangladesh over six months in 2007 is discussed in this term paper.
“Inflation in Bangladesh over six months in 2007” is the partial requirement under the course of principles of macroeconomics (Eco 102). As it is said earlier that during the inflation period the price of goods and services go up and the people will tend to buy less goods and services because they feel themselves poorer because inflation raises the cost of goods and services what they buy .Here, it is trying to identify the inflation, the reasons behind inflation and the current situation of inflation in Bangladesh.
To serve the purpose, it is followed standard research methodology to extract the findings and applied sophisticated data analysis techniques to get consistent and sound output. For the term paper secondary data have been collected. Secondary data have been collected from the internet, the article and the reports published in the daily newspapers related to this topic.
Bangladesh’s rice market currently operates in an import parity price regime, that is, the cost of making imported rice available in the domestic market dictates the rice price in the domestic market. The earlier benefits from excess food reserve in India are no more available to Bangladesh.
The inflation results from increases in the cost of petroleum imposed by the member states of OPEC. Since petroleum is so important to industrialized economies, a large increase in its price can lead to the increase in the price of most products, raising the inflation rate.
Current estimates show that the rice price had risen by more than 35 percent over a period of the last five months, which corresponds with the trend in the international rice prices. A recent ERG (Economic Research Group) paper concluded that the increase in domestic fuel prices would lead to 10 percent or more inflation.
The reasons for the price increase are identified by:
(A) Increase in domestic fuel prices (effective since 2nd April 2007)
(B) Increase in rice price in the international market
Here it is trying to identify the general, food (rice) and non food (oil or Industrial goods) inflation rate over the last six months in Bangladesh. From January to June there is an increasing and decreasing inflation rate for all of the cases. For the convenience the table is given below:
Table: Inflation rate over last six months in 2007
Cost push inflation
Cost-push inflation or supply-shock inflation is a type of inflation caused by large increases in the cost of important goods or services where no suitable alternative is available. Cost push inflation occurs when firms increase prices to maintain or protect profit margins after experiencing a rise in their costs of production.
(I) Rising imported raw materials costs:
The main causes of cost push inflation are rising imported raw materials costs perhaps caused by inflation in other countries or by a fall in the value of the pound in the foreign exchange markets. In the figure: when AS1 (Aggregate Supply) and AD1 (Aggregate Demand) intersect at equilibrium point 1, then price is P1 and output is Y1. Because of the cost of goods go up supply curve shifted to left to AS2. Then the new equilibrium point is 2 and price goes up from P1 to P2 and the output level goes down from Y1 to Y2. The gap between outputs denotes the stagnation and gap between the price levels denotes the inflation; altogether they denote the stagflation.
Rice and petroleum both of them are very important goods for our country. In terms of the rice and oil or petroleum the cost push inflation is true. Because of the price of the international market Bangladesh has to import rice and oils at that international price. Thus the supply is decreased and it cannot meet up the demand for that commodities. That is why the price of commodities goes up and therefore Bangladesh has to face the inflation problem.
(II) Minimum Wage Law
Minimum wage law are caused by wage increases, which are greater than productivity increases this, is especially important in industries, which are labor-intensive. If wages account for 25% of a firm’s total costs then a 10% increase in the total wage bill will cause the firm’s total costs to rise by 2.5%.In the figure: the wage at which supply and demand balance is WE. At this equilibrium wage, the quantity of labor supplied and the quantity of labor demanded both equal LE. By contrast if the wage is forced to remain above the equilibrium level, perhaps because of a minimum wage law, the quantity of labor supplied rises to LS and the quantity of labor demanded falls to LD. The resulting excess supply of labor, LS – LD represents unemployment. Because of the increased wage the cost of production go up and it also affects the price of commodities.
Higher indirect taxes imposed by the government – for example a rise in the specific duty on alcohol and cigarettes, an increase in fuel duties or a rise in the standard rate of Value Added Tax. These taxes are levied on producers who, depending on the price elasticity of demand and supply for their products can opt to pass on the burden of the tax onto consumers.
These are some reasons of cost push inflation in terms of food and non food items for all of the reasons Bangladesh now facing an inflation problem for the last six months in 2007.
It is clear that Bangladesh is now facing an inflation problem for the last six months in 2007. For the months the inflation rate is increasing. For this reason the Govt. of Bangladesh Is trying to take some steps. Finance and planning adviser Mirza Azizul Islam in the budget speech said import duty was withdrawn from a number of food items and the government would import some quantity of those items to increase their supply in the market. He acknowledged that inflation remained a major challenge for the economy and pledged a slew of measures to keep it within tolerable limit. Bangladesh Bank will ask the commercial banks to give credit on softer terms to new importers. The government will set up four wholesale markets in the city to ensure smooth supply of essential goods which also pledged strict monitoring by national taskforce up to upazila level.
(5) The daily star-3rd June and 1st July, 2007
(5) New Age-6th July, 2007