Inflation is a lagged macroeconomic variable in the sense that it encapsulates what happened in the economy so far. Thus it gives an idea about what needs to be done or not needs to be done to foster economic activities.
Bangladesh Bureau of Statistics (BBS) released the number of latest information on month-on-month inflation last week. Inflation has increased by 0.20 percentage points, from 7.15 in November to 7.35 per cent in December. Since these numbers are based on a representative sample of price-related information, from pure statistical point of view one could raise question about the statistical significance of this increase. Since the increase is very small, only 0.20 percentage point, the margin of error is very important.
   Keeping these technicalities aside, the reported numbers indicate one thing that inflation shows an increasing trend. While this should not be a surprise given the ongoing supply side disruption in the economy as a result of political instability and vandalism, a close look into the inflation numbers would help to determine the policy imperatives for the government. A couple of observations deserve to be highlighted from the analysis of the reported inflation numbers.
First, the increase of overall inflation in December vis-Ã -vis November is attributable to food price inflation. In November, food price inflation was 8.55 per cent, which increased to 9.00 per cent in December. The non-food price inflation has declined in December to 4.88 per cent from 5.08 per cent in November.
Along with human causality and sufferings, economic activities have been a main victim of the ongoing political instability and vandalism. There has been a clandestine structural change in the economy of Bangladesh. While a large number of people still depend on agriculture for their livelihood, services have emerged as the largest sector and accounts for about 53 per cent of total GDP (gross domestic product). This sector is the main victim of hartals and political violence.
Fall in income does not affect the consumption of all items equally. If a household has to reduce the overall consumption as a result of fall in income, consumption of non-food items would be the first one to be compromised. Food items will be the last one to be curtailed as a result of falling income.
Recent disruption in household income as a result of political violence is likely to affect the consumption of the non-food items first. In principle, it can lead to fall in overall demand for non-food consumption. If this happens, their price would not increase or may even fall. Whether all these conjectural possibilities take place in reality is an empirical question.
Second, another important thing to note is that although food price inflation increased in December compared to November, it significantly differs between urban and rural areas. In case of the urban areas, the food price inflation stands to be 9.89 per cent whereas in the rural areas it is only 4.69 per cent. This difference indicates the disruption in supply chain - the delivery of food items from the rural areas to the urban consumers. The political violence that escalated since mid-November may not have affected the agricultural production, but their transportation and commercial sale have been seriously affected. Either they could not be transported to the urban area or the cost of transportation was very high. This is the main reason why food price inflation have increased by almost a double-digit in December compared to November.
Since the agricultural output could not be smoothly transported to the urban markets or cost of transportation increased significantly, the producers were compelled to sell them in their own locality. As a result, the rural areas were probably relatively glutted with agricultural items. This may be the reason why food price inflation in rural areas was just half of that in the urban areas.
What are the policy imperatives of these inflation numbers? It is more or less clear that the recent increase in inflation is the outcome of ongoing political violence that affected the household income and the supply chain of the agricultural commodities. The first best solution to these problems is the stoppage of the ongoing political violence and return to normalcy in our daily life. If the streets become free of violence, no further action would be required to motivate the truckers to run their trucks, no one has to tell the workers to get back to work, and no stimulus would be required for households to increase the consumption of non-food items.
However, the first best solution is not in the picture yet. Therefore, the policymakers should think of the second best options. These options would involve both administrative and policy measures. The government should leave no stone unturned to provide support to the transportation of goods in this turbulent time. The importance of multi-modal transport network by taking advantage of our rivers has been emphasised in different research. So far no attention has been given to it. Probably now is the time to diversify our transportation system to waterways too. So far railways have been used mostly as a mode of carrying passengers. A reorientation of outlook to use it more for carrying freights is also important.
It is now well-known that the external sector (export and remittance) may stumble this year implying that impetus for growth has to come from domestic sources. Data indicates that total remittance in 2013 has declined in absolute term compared to 2012. Available export data for current fiscal year shows more or less a satisfactory performance, but the real effects of months-long turbulent situation are yet to emerge in the data.
Again, investment has been suffering for some time now. All these mean private consumption will be the main determinant of growth this year. This is why the consumption of non-food items should not suffer this year. The government should take required measures to promote it to provide a growth impetus into the economy.
Consumer credit is one way to promote private consumption, especially the non-food items and consumer durables. The government has taken a very conservative stance on the consumer credits for different reasons. Conditions to get it have been made very stringent. Recent information about the non-food inflation probably indicates that the ground to take a conservative stance about consumer credit does not hold anymore. Therefore, a policy revision in regard to consumer credit is required to vitalise the economy by promoting private consumption at this depressed environment.
Similar arguments apply in the case of private investment as well. The government should provide incentive to the potential investors. Cross-country experience suggests that when the external sector stumbles and private consumption suffers, promotion of private investment by providing required incentive is the right policy for a government to follow. The Government of Bangladesh should also take this right step to minimise the damage caused by political instability and violence.  Â
Abul Basher, PhD is Researcher at Bangladesh Institute of Development Studies (BIDS),              former economist, World                Bank, and former faculty, Willamette University, USA. cccg67@yahoo.com
Policy imperatives of the recent inflation data
Abul Basher | Published: January 14, 2014 00:00:00 | Updated: November 30, 2024 06:01:00
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