Inflation, taka devaluation eroding real wealth value

Steep inflation and weakened local currency are eroding the real value of wealth as the double-pronged depletion bites into the pockets or saved funds, economists say and cite its divisive social impact.
The rate of inflation (food inflation) topped over 12 per cent last August, by official count, in a decade high since 2012.
The taka depreciation against the US dollar was recorded 31 per cent in more than a year to November. This is the fastest weakening of the Bangladesh currency, not seen ever before, according to central bankers.
Pains of such inflation coupled with depreciation are, however, unevenly shared, with poorer people bearing the brunt. But, even those at the top of society who belong to the millionaire group also feel the pinch, to a degree.
This macroeconomic factor also affects social fabric with the poor getting poorer with income poverty rising.
"Of course, the higher inflation, and depreciated money are eroding the fortunes," says Dr M Masrur Reaz, chairman and CEO Policy Exchange of Bangladesh, a private think-tank.
He mentions that Bangladesh's people have lost at least 38 per cent of their wealth since 2016. He cites GDP deflator.
"If we consider GDP deflator, there was inflation at least 38 per cent since fiscal year 2016. So we lost 38-percent wealth, and mostly financial wealth," says the economist, who worked with World Bank's private-sector window, the International Finance Corporation (IFC).
Bangladesh Bureau of Statistics or BBS prepares the GDP (gross domestic product) deflator, an economic measure, which is the money price of all domestically produced goods and services in a year relative to the base year.
In dollar terms, currency weakening reduced wealth by 31 per cent, according to the calculations cited by Dr Masrur on the bites of devaluation and inflation.
Given the surge in inflation, it eats away nominal GDP worth about Tk 44.39 trillion. After adjusting the inflation of more than 9.0 per cent in the fiscal year 2023, the real GDP should have fallen accordingly.
Dr Masur is critical of the measurement of the real GDP. "The inflation adjustment does not reflect in real sense in the real GDP value," he says.
On a larger scale, inflation erodes all financial gains. Share-market dividends have also been falling in accordance with the rate of inflation.
"If anyone gets a 10-percent dividend for stock-market investment, actually he gets 1.0-percent dividend in real sense," says a stockbroker at Dhaka Stock Exchange, wishing anonymity.
"How should investors respond? One lesson from the price-adjusted numbers is the central importance of inflation in assessing the wealth," he told the FE writer.
Dr Zahid Hussain, an independent economist of Bangladesh, says inflation hit hard the poor as they have no way to raise their income.
"There are many empirical evidences suggesting that poverty and income inequality rise as a result of higher inflation in an economy. Even Bangladesh has such studies," he told the FE.
However, there is a fortunate group in society having immovable property at prime locations and precious metals that can ignore higher inflation. The prices of such type of assets go up during the era of high inflation. Many invest in stable currency like dollar where the erosion is almost zero, he added.
"I know they are limited in number, but they will be gainers and pressures much lower to them," Dr Hussain, who worked as lead economist of the World Bank, elaborates on divisive effect of inflation-devaluation twin.
During higher inflation, gold prices often rise. Gold spot prices in London hit an all-time high at $2045.40 per oz on December 01. In Bangladesh, gold prices hit over Tk 104650 per bhori or 11.66 grams.
"This is simply because investors believe it is an effective hedge for them."
The poor do not have any hedges, Dr Hussain mentions.
In millionaire cases, the number of accounts having deposits between Tk 10 million and Tk 50 million surged by 3,362 in a quarter between April and June 2023. The number of millionaire accountholders stood at 113,554 in June 2023, Bangladesh Bank statistics show.
Dr Hussain finds the number of millionaires incongruous with the wage rate that has poor growth. "Where the money goes, if the owners don't raise the wages?" he questioned.
"To my mind, in real terms, the actual millionaires will fall when the inflation to be adjusted."
There is a huge number of "inflation millionaires" who would no longer qualify if the millionaire threshold were adjusted for inflation in 2023, Dr Masrur says, about inflated account amounts.
The reason for inflation in Bangladesh is wide, from Russia's invasion of Ukraine to local supply chain or vested business group who hold goods to take advantage of market shortage. Dollar shortage is another key reason behind the persisting higher inflation for long.
Dr Ahsan H. Mansur, executive director of the Policy Research Institute of Bangladesh, says the limited-income group of people, for example, pensioners, or family living on FDR funds are critically important.
"The pensioners get 5.0-percent increase in pay in a year amidst the 9.0-percent inflation. The FDR now up but this is almost same with the inflation rate," he adds.
"What you get today, but the real value in future will go down - adjusted for inflation."
The 2023 edition of the Credit Suisse Global Wealth Report reflects on a year that has delivered a significant setback in what had been a consistent uptrend in the accumulation of wealth in the household sector.
"2022 recorded the first fall in net global household wealth since the global financial crisis of 2008," the report says.
It says, "Measured in current nominal USD, total net private wealth fell by USD 11.3 trillion (-2.4 per cent) to USD 454.4 trillion at the end of the year.
Wealth per adult also declined by USD 3,198 (-3.6 per cent to reach USD 84,718 per adult at the end of 2022.
Much of this decline comes from the appreciation of the US dollar against many other currencies."
The global report mentions: "If exchange rates are held constant at 2021 rates, then total wealth increased by 3.4per cent and wealth per adult by 2.2 per cent during 2022. Keeping exchange rates constant but counting the effects of inflation results in a real wealth loss of 2.6 per cent in 2022."

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