Impact of inflation & stagnant wages on social and economic disparity

Caught in the whirlwind of escalating prices and stagnant paychecks, Bangladesh stands at the crossroads of economic disparity. The economy of Bangladesh currently faces a myriad of challenges, including a rising gap between inflation and wage rates. Living expenses are increasing due to rising food inflation and currency depreciation, causing citizens to struggle to manage their finances. Experts attribute the high inflation to the Russia-Ukraine war, which caused supply chain disruptions and worsened the impact of Covid-19 on the global economy. Other factors, including inconsistent monetary policy over the years and corruption, also contribute to the rising inflation.

The above graph shows that the income rate is not being remedied on par with the rising inflation and the gap is widening erratically. At the start of 2022, the gap was 0.1 per cent but afterwards it gradually widened. A gap of 3-4 per cent was observed between the wage rate and inflation in recent times. According to a recent survey published by the Bangladesh Bureau of Statistics, the number of unemployed persons in Bangladesh is more than 2.26 million. As a result, employers can easily employ many workers by providing abysmally low wages. Due to the high unemployment rate, the bargaining power of workers is drastically reduced. In Bangladesh, there are no influential worker union except the Bangladesh Road Transport Workers Federation. The absence of unionisation of workers also hinders the bargaining power to increase their wages. Moreover, these types of unions mostly support the cause of the owners and create room for more inequality. So workers cannot negotiate with the employers in a united way.

The above-mentioned diagram shows that all the SAARC countries except Sri Lanka have more or less the same inflation rate. Sri-Lanka went through an economic collapse so that is an exception. Apart from this, the other countries are managing to keep their inflation in line by correcting their income growth accordingly, except Bangladesh. Inflation and wage rate gaps can be linked to economic injustice. This gap has far-reaching implications going beyond individual pain, endangering societal stability and impeding long-term economic growth. Those with higher incomes and access to assets that are appreciated through inflation like real estate and stocks, are far better than people who have low incomes and limited assets. With the cost of essential goods and services surpassing pay growth, people are compelled to compromise to meet their fundamental necessities, living in perpetual financial insecurity. A struggling workforce, under the pressure of rising living costs and lack of productivity, is making the future look grim for the once-booming economy of this country. As a result, overall economic performance is dwindling and the country's development goals are being hampered.

The graph-1 shows the hypothetical scenario of Bangladesh's real wage in last few years.

Inflationary pressures in Bangladesh drive up prices for goods and services, causing significant challenges for its citizens. Stagnant wage rates exacerbate the issue, resulting in a sharp decline in purchasing power. People are increasingly uncertain about their ability to afford necessities like food, clothing, and shelter, eroding their overall quality of life. This inflation-induced cost burden is also casting a shadow of doubt on future living expenses.

Adding to the woes, people's savings lose value as inflation rates consistently outpace the interest rates offered by banks, typically around 5-6 per cent. With inflation edging close to 10 per cent, many are discouraged from saving or engaging in long-term financial planning. Businesses in Bangladesh grapple with soaring production costs, while investors are the cautious about long-term commitments. The situation is especially harsh for individuals with fixed incomes, like pensioners, whose purchasing power is eroded, making it increasingly difficult for them to make ends meet.

While those with fixed-rate loans might benefit from inflation's erosion of debt value, those with variable-rate loans or high-interest debt face greater challenges in meeting their financial obligations. This economic environment reshapes consumption patterns, with people reducing spending and prioritising immediate needs over luxury items. Moreover, inflation is a key driver of underpayment, leading to frustration, discontent, and anger. The cost of essential goods rising with inflation can be linked to lower mental health scores. Based on a study published in the World Psychiatry journal, citizens from highly unequal countries are 1.2 times more likely to suffer from depression due to income disparity.

Thus the gap between wage rates and inflation has far-reaching effects on a personal and state level. To minimise this gap, advanced countries go for inflation targeting. To do so, the Bangladesh government should take the initiative to develop experts for inflation targeting. Moreover, the government could implement indexation like other developed economies. Indexation is used to adjust for the effects of inflation and cost of living. In the labyrinth of Bangladesh's economic challenges, the concept of indexation could emerge as a potential beacon of hope. Furthermore, the government should follow consistent monetary policy and let the market decide the interest rate. To top it off, it's necessary to create public awareness regarding inflation and ways to cope with it on a personal level.

Syed Safat Bin Saqlain and Siam Mahmud are undergraduate students at the Department of Economics and Social Sciences, BRAC University. [email protected], [email protected]