Mohammad Zoynul Abedin1*, Fahmida E Moula2 and Shahnaz Parvin (2013). Inflation Behavior: Evidence from
Bangladesh.
Bangladesh
Res.
Pub.
J.
8(1):
07-17.
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from
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Abstract
The rise in the inflation rate has prompted two views of the sources of
higher inflation in Bangladesh. One is the cost-push inflation which is
typically caused by supply shocks such as flood, draught and oil price hike.
The other is the demand-pull inflation that occurs when the aggregate
demand (AD) in an economy outpaces the aggregate supply (AS). This
article has two objectives: first, it identifies the leading source of the current
inflationary pressure in Bangladesh using economic data. Second, it argues
that more aggressive concretionary monetary policy is needed to pull
down the inflation rate. The results indicate to maintain price stability; the
government must work on both economic and non-economic factors that
have instigated the ongoing inflation. It would be important to address the
sources underlying slow domestic demand and take steps to counter their
adverse impacts. At the same time, the Bangladesh Bank needs to identify
the factors contributing to monetary expansion, assess the extent of the
problem, and design appropriate policy mix consistent with current
situations.
Introduction
Inflation has become a well-entrenched phenomenon in many countries.
Somehow it seems that the general price level can only rise implying that there is
an inflationary bias in society. Consensus has it that inflation is likely to impose
considerable economic costs (Fischer and Modigliani, 1978). Types of costs are,
for instance, menu costs, the decrease in real money balances and decreased
efficiency of the price system. There is, however, a lack of understanding of the
process which systematically generates inflation (Davis, 1991). One of the central
objectives of traditional monetary policy is inflation control since the belief is that,
among others; low inflation helps to improve resource allocation and fosters rapid
and stable economic growth. The view also holds that inflation is primarily a
monetary phenomenon so that low inflation is to be achieved mainly through
aggregate demand control by pursuing concretionary monetary (and fiscal)
policies. It is argued that these policies should also be supported by liberalization,
privatization, and other macroeconomic reforms to create a more open and
competitive economy driven by the private sector. In short, the argument is that
there exists a tradeoff between inflation and growth (alternatively between
inflation and unemployment) that makes inflation targeting as the dominant
*Corresponding Authors email: zoynulmiu@gmail.com
1 Assistant Professor, Department of Finance and Banking, Hajee Mohammad Danesh Science and
Technology University Dinajpur 5200, Bangladesh
2 Student, Master of Social Science, Department of Sociology, University of Chittagong,
Chittagong-4331. 5200, Bangladesh
Abedin et al.
Methodology
The core of the subject matter is designed based on the concepts and
their theoretical applications. A significant feature of the study is the use of
secondary data and information. Almost 14 years (1995-2009) of macroeconomic
data are used throughout the paper. The important secondary sources are the
corporations annual reports, books, journals, magazines, and the daily news
paper also. The collected data and information have been analyzed and
examined critically through statistical tools and techniques, graphs and figures in
order to make the study more understandable, informative and useful towards
the researchers, academicians, governments agencies, regulatory bodies, policy
makers, students and mass people as a whole.
developing countries since the 1990s.1 It is widely viewed that globalization has
had a positive impact on prices for over one and a half decade by heightening
competition both on the demand and supply side. However, the specter of
inflation has once again become a major concern for central bankers and policy
makers around the world, as many countries have been experiencing high
inflation largely owing to a notable increase in commodity prices. The prices of
cereals, petroleum products, edible oil, and metals are skyrocketing in the
international markets in recent years. Consequently, the commodity price indices
have shown an upward trend lately (Figure 1) (Islam 2008).
General inflation
1.94
2.79
4.38
5.83
6.49
7.16
7.2
9.94
6.66
7.31
8.79
11.41
Food Inflation
1.38
1.63
3.46
6.93
7.9
7.76
8.11
12.28
7.19
8.53
11.33
13.28
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Abedin et al.
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11
2009-10
2010-11
2011-12
221.53
7.31
240.55
8.553
196.84
5.45
241.02
8.8
267.83
11.34
20.01
4.15
266.61
10.62
295.86
10.47
227.87
11.15
223.39
7.16
235.76
7.96
202.36
5.62
244.38
9.4
264.13
12.03
210.81
4.18
269.31
10.2
289.82
9.73
234.47
11.22
216.98
7.69
252.21
9.85
183.4
4.99
232.81
7.3
276.82
9.76
190.87
4.07
260.01
11.68
310.58
12.2
211.82
10.98
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13
2008
26.8
9.9
8.8
9.1
12.3
7.7
12
22.6
2009
-8.3
6.7
4.4
12.4
7
12.6
20.8
3.4
2010
8.2
8.1
7
12
6.6
10
11.7
5.9
2011
13.8
10.7
8.8
8.9
12.8
9.6
11.9
6.7
2012
12.31
7.93
9.4
7.55
15.05
11.02
8.79
9.5
Sources: IMF, International Financial Statistics databases; ADB, Asian Development Outlook 2011.
Abedin et al.
14
inflation, which stood at 9.6 per cent in 2010, has also remained close to doubledigit in 2011. Inflationary pressures also re-emerged in the Bangladesh economy
as the consumer price index increased by 8.8 per cent in 2011 from 7.3 per cent in
2010. Sri Lanka after some respite from high inflation in 2010 is again experiencing
rising inflation.
The current practice of calculating national CPI is, first, to compute
separate CPIs for rural and urban areas using monthly commodity-wise price data
based on field-level surveys on a monthly basis and average commodity weights
derived from the consumption baskets. In the second stage, the national CPI is
calculated as the weighted (using the share of population as weights) average of
the CPIs for rural and urban areas; giving 70.9 percent weight to the rural CPI and
29.1 percent to the urban CPI. At present, 215 commodities and services are
included in the rural CPI while the number of items is 302 in the urban CPI.
Table 5: Descriptive statistics of month-to-month price changes (annualized rate)
National
Mean
Std. dev
Skewness
Kurtosis
Rural
Mean
Std. dev
Skewness
Kurtosis
Urban
Mean
Std. dev
Skewness
Kurtosis
No. of observations
2005-06
2006-07
2007-08
2008-09
2009-10
2010-11
2011-12
7.2
0.995
0.718
0.238
8.72
3.21
0.45
0.29
9.71
1.53
-0.72
-0.64
8.65
1.2
-0.21
-1.44
6.63
1.3
0.19
0.02
8.78
1.42
0.066
-1.88
10.63
1.04
-0.74
-0.23
7.34
0.91
0.65
1.11
9.03
3.55
0.57
0.31
9.87
3.56
-0.65
-0.61
8.74
4.23
-0.35
0.69
6.36
5.2
-0.69
-0.87
8.46
3.65
0.34
-0.46
10.89
2.56
0.22
0.35
6.85
1.21
0.8
0.45
12
7.95
4.35
0.42
2.47
12
9.32
8.82
-0.71
-0.03
12
8.41
3.69
-0.87
-0.73
12
7.27
6.45
0.45
-0.72
12
9.55
4.52
0.91
-0.85
12
9.98
5.54
0.65
-0.11
12
15
(Islam 2008).
Conclusion
Current indications show that commodity prices in the international market
are likely to rise during the coming months of FY12. With greater global economic
integration, inflation in Bangladesh is more open now than before to external
pressures coming from outside the country. The reasons lie in many factors
including high import dependence, increased global pressure of excess demand,
weak productivity growth in the domestic economy, and persistence of
significant structural and institutional rigidities. The last inflation episode that
Bangladesh faced was not policy induced, but was fueled more by domestic
supply shocks and global price hikes. But the current buildup of inflationary
pressure can partly be attributed to the liquidity expansion that took place in the
first half of FY12. With rapid buildup of net foreign assets (NFA) and in the absence
of sterilization, liquidity expansion has created some pressure particularly in asset
markets (stock and real estate markets) and in non-food prices. These issues need
more explicit consideration in Bangladesh Banks monetary policy response along
with clear signals for the future.
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