There is a misperception that any price increase is inflation, so there is a tendency to compare the inflation rate with the increased prices of various commodities. The rise in the prices of several commodities is not inflation, although the price hike may affect consumers negatively. Inflation is the rate of increase in prices over a given period and is typically a broad measure of the overall increase in prices of goods and services or the increase in the cost of living in a country. According to the International Monetary Fund (IMF): "Inflation represents how much more expensive the relevant set of goods and/or services has become over a certain period, most commonly a year." In other words, inflation measures how quickly prices for a set of goods and services rise over time.
Over a decade ago, Owen F Humpage, a senior economic advisor at the Federal Reserve Bank of Cleveland, rightly mentioned in a commentary that inflation is one of the most misused words in economics. "Strictly speaking, inflation refers only to a drop in the purchasing power of money that results when a central bank creates more money than its public wants to hold. Inflation manifests itself as a rise in all prices and wages-not just some subset of prices," he tried to explain. Milton Friedman, the guru of the monetarist school of economics, pointed out that inflation always results from a monetary mismatch and argued that it is always a monetary phenomenon. That's why it is the responsibility of the central bank to control the money supply rightly to curb the inflationary pressure. Though the orthodox view of the monetarist regarding inflation has been challenged by many other economists over the decades, the theory still prevails strongly.
Again, the central bank is usually not responsible for measuring the inflation rate. It is the responsibility of the national statistical agency or relevant body. And the measurement of inflation is always critical. There is always an argument that official statistics regarding inflation do not adequately capture the prevailing price situation from time to time, mainly due to flaws in estimating or measuring inflation. That's why the method of calculating the inflation has to be revised or updated after a certain period of time, say 10 years. By doing so, the changes in consumption and expenditure pattern can be tracked more accurately.
Bangladesh Bureau of Statistics (BBS), the country's national statistical agency, has updated the method of inflation calculation, which it termed modernisation of the consumer price index (CPI) compilation by changing the base year from 2005-06 to 2021-22. The change has taken place in line with the latest (2020) CPI manual of the International Monetary Fund (IMF).
In the updated index, BBS has introduced the new basket weights based on the Household Income and Expenditure Survey (HIES) 2016-17. So, the new basket contains 383 items (goods and services) with 749 varieties. There are 127 food items with 242 varieties and 256 non-food items with 507 varieties. In the previous index, the weight for food was 56.18, which came down to 44.86 in the new index, and so the weight for non-food items goes up to 55.14 from 43.82.
Again, the new index replaces the International Labor Organization (ILO)'s eight groups with twelve groups according to the Classification of Individual Consumption by Purpose (COICOP), an international reference classification of household expenditure designed by the Statistics Division of the United Nations (UN). BBS has also started to release the updated CPI and inflation data since April this year, providing more reliable statistics on the overall price level of the country.
The inflation statistic shows that the outgoing year, 2023, is a year of high inflation. The annual average inflation rate was 7.70 per cent at the end of December last against 5.54 per cent in December 2021. The rate stood at 9.42 per cent at the end of November this year.
The upward trend of inflation started in the second quarter of the last year and jumped further in the first quarter of the outgoing year. The monthly inflation rate crossed the 9 per cent mark in March and continued until November. The figure for December will be released in the first or second week of January next year, and it is presumed that the rate will be above 9 per cent.
Policymakers were initially indifferent about the persistent rise in inflation. Later, the Bangladesh Bank intervened by hiking the policy rate modestly. In the year under review, the central bank hiked the repo four times- January, July, October and November. By repo rate, the central bank is trying to make the fund costly and driving the banks to increase the interest rates. A higher rate of interest will encourage people to deposit more money in the banks in exchange for higher returns and discourage people from borrowing more from the bank at a higher cost.
Meanwhile, recognising the higher inflation, the government has upwardly revised its budgetary target to keep the inflation rate at 7.50 per cent by the end of June next. It initially set a target of 6.0 per cent in June last, and the central bank aligned its inflation target accordingly. There was, however, a clear sign of upward movement of inflation, above 9 per cent, and the half-yearly monetary policy statement, released in the third week of June, cautiously acknowledged that 'achieving the target of 6.0 per cent inflation in FY24 may prove to be challenging, as it appears to be relatively higher..'. Now, the upcoming monetary policy statement, likely to be announced by the third or last week of January, will re-fix the target at 7.50 per cent, acknowledging the excessive inflationary pressure.
As the national parliamentary election is scheduled to be held on January 7, inflation becomes a significant concern, especially for the ruling party. It is reflected in its election manifesto, released last week by the party chief and incumbent prime minister. According to the manifesto, there are 11 key areas that the party will emphasise in the next five years if re-elected. The first is 'striving to keep commodity prices within everyone's purchasing power.' It is an implicit acknowledgement that inflation has eroded people's real income, so it must be contained.
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