Price level unlikely to return to earlier stage

Last Monday, a new fiscal year started in Bangladesh, carrying the burden of high inflation along with the official expectation that the excessive inflationary pressure will be moderated by the end of the year. On a day before or the last day of the past fiscal year (FY24), the national parliament of the country formally endorsed the budget worth Tk 7.97 trillion (or around US$68 billion) for the new fiscal year (FY25). The budget has set two goals: to cut down the annual inflation rate to 6 per cent from the exuberant 9 per cent by June next, and achieve 6.75 per cent gross domestic product growth (GDP).
In his closing statement of the FY25 budget in the parliament, the finance minister AH Mahmmood Ali acknowledged the persistent pressure of inflation on the economy. He expressed his concern about the potential impact of the continuation of a contractionary monetary policy on the pace of economic growth in the near future, highlighting the gravity of the situation.
The finance minister's reservation on a tight monetary stance is likely to pose a significant challenge for the central bank governor. The governor is currently working on the half-yearly monetary policy statement (MPS) for the first-half of FY25 (or July-December, 2024). The ultimate objective of the upcoming MPS will be to design a credit policy to reduce inflation to the desired level of 6 per cent. The central bank has policy rates as a key monetary tool, but it may have no option but to enhance policy rates further to reduce the money supply in the market and bring down inflation thereby adding to the complexity of the situation.
The International Monetary Fund (IMF) has already suggested increasing the repo rate, the key policy rate, to 9.0 per cent by December next. Bangladesh Bank increased the repo rate to 8.50 per cent last May. Repo rate is the rate at which the central bank lends money to commercial banks in the event of any shortfall of funds. A higher repo rate means a higher cost of borrowing for the banks, and so they cut the borrowing, which ultimately reduces the money supply in the economy and thus assists in containing inflation. This is what the economics textbook says and what most of the central banks worldwide try to do.
The combined efforts of the Bangladesh Bank and the finance ministry against inflation, may, however, become more challenging in the coming days due to the current global inflation trend. Globally, inflation jumped in 179 out of 194 countries two years ago when the United States (US) witnessed an inflation of 40-year high. Since then, the pace of inflation has slowed, raising optimism that consumer prices would soon return to normal levels. That is not happening, as bringing inflation down does not necessarily mean that consumer prices will return to the level they once were. What will happen is that consumer prices will stop increasing so rapidly givng some relief to the fixed-income people. People will continue to pay higher prices for consumer goods than they paid two to three years ago, although the current prices may be slightly lower than they were a year back.
An article that appeared in the digital arm of the Global Finance magazine two months ago highlighted the phenomenon succinctly. The article titled 'The Consumer Price Index Only Tells Part of the Story' said that the persistence of inflation despite central bankers raising interest rates consistently for years pointed to 'some novel features of the current post-pandemic moment.' It added that 'corporate consolidation and market concentration may be major contributing factors to the inflationary malaise.' Many companies have used inflation as an excuse to hike prices far beyond the rise in production costs, and the central banks can do little in this regard. "Companies enjoying a semi-monopolistic grip on consumers' choices can set prices however they like," it added. It is also true for Bangladesh. Once the price level increases and sustains for a certain period, it is unlikely to come down significantly even if the cost declines or stays unchanged. The ultimate result is a higher rate of inflation.
In Bangladesh, it is common to attribute the persistent rise in the price level or inflation to the unregulated market and the so-called market syndication. Whether a powerful syndicate truly exists in the market or not, rent-seeking activities are prevalent and often create barriers to regulating the market or reducing the prices of essentials. In this context, neither fiscal nor monetary innervations can be expected to play a significant role.
Now, suppose inflation rate comes down to 8 or even 7 per cent within a couple of months. In that case, it may be a great relief for the policymakers, although not necessarily for many consumers. This is because the overall price level will not return to the level it was a year ago, which means that the prices of most goods and services will remain high. The lower rate of inflation will be a low pace of rise in price level that continues to erode most people's real income. It will also be fine for those who have obtained significant national wealth. The country's growing income and spending disparity are no doubt contributing to high inflation.
Given the multifaceted nature of inflation in the country, there is no single solution to combat it. Conventional monetary policy tools, when combined with fiscal measures, have limitations, as noted in the foregoing. Overcoming the challenges requires the implementation of non-conventional steps and administrative intervention to address other contributing factors. These are complex tasks that necessitate a comprehensive understanding and acknowledgement of the factors by the authorities.
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