Temporary working capital

Inflation risk concerning






Even after going through a series of restrictions or blockages to contain the infection, the inflation situation in the country had not worsened too much in the past fiscal year (FY21). Looking at the official price inflation statistics, one would agree with the statement. The average annual inflation rate, calculated using the Consumer Price Index (CPI), stood at 5.56 percent in the last fiscal year compared with 5.65 percent in the last fiscal year. FY20. On a point-to-point basis, the inflation rate fell to 5.64 percent in June of the previous fiscal year, from 6.02 percent last June. The Minister of Finance, in his budget speech in June this year, argued: “Headline inflation, including the price level of basic necessities, has also remained stable.

Inflation actually measures how more expensive a set of goods and services has become over a period of time, typically a month or a year.

The rate of inflation refers to the rate of change in the prices of goods and services. The prices of different products, however, change at different rates. Thus, the rate of inflation depends on how the statistical agency calculates the average prices of all goods and services in an economy. In Bangladesh and many other countries around the world, it is the CPI widely used to officially estimate inflation.

Whatever official statistics are revealed, it can sometimes be difficult to grasp without delving into the relevant data. The monthly trend of price inflation is a better indicator to understand the more realistic model of the price situation in a country, because inflation is the rate of price increase over a period of time.

The monthly inflation trend from last year showed that the inflation rate peaked at 6.44 percent last October, and then started to decline. In January of this year, it dropped to 5.02 percent. It then started to rise again and finally reached 5.64% in June. Thus, inflation over the last fiscal year has fluctuated although it has remained above the average annual target of 5.40 percent for most months.

Higher inflation means a sharp erosion of real income as well as the purchasing power of most consumers. That is why the government and central banks are trying to curb rising inflation. When an economy grows at a faster rate, as evidenced by the growth rate of gross domestic product (GDP), this also fuels inflation. To balance growth and inflation, the central bank tries to contain or curb the money supply in the market.

With excess or extra money on hand, consumers may be tempted to spend on goods. As the production and supply of goods do not always match the increasing demand in a short period of time, this pushes up the prices of limited goods. So inflation rises and makes a lot of things more expensive. By applying monetary tools such as rate hikes, the central bank intervenes to divert excess money from the market to the banks. The process reduced the money supply and the purchasing power of consumers. As a result, aggregate demand has declined and so has inflation.

The great complexity of the real world, however, makes it difficult to implement the money supply formula. Thus, the decision of central banks to contain inflation does not always bring optimal results. In some cases, it works well. Again, in many cases this does not work well. Nevertheless, the role of the central bank in managing inflation is still critical.

During the pandemic, however, central banks around the world need to focus less on inflation to stimulate economic growth by providing monetary support to regain aggregate demand. In Bangladesh, the central bank eased policy rates, giving banks space to reduce lending rates and extend more credit to different sectors. There were other measures such as refinancing and the injection of working capital. All of these expansionary measures were necessary to help the agriculture, manufacturing and service sectors continue their business activities during the past fiscal year. The result is mixed due to several factors such as some misuse of funds, lack of coordination and the lag effect of the transmission of monetary policy. Two general results are visible. Economic growth is ultimately weaker than initially expected. The GDP growth rate stood at 5.47 percent in FY21, according to a provisional estimate, compared to 3.51 percent in FY20. Despite production losses in various sectors, the significant recovery of other sectors has enabled economic growth to be recorded. Another is a rise in inflation due to expansionary monetary policy. The increase in the money supply in the market has contributed in part to fueling inflation.

The macroeconomic phenomenon largely aligns with the global trend. International Monetary Fund (IMF) Economic Advisor Gita Gopinath at the Bruegel 2021 Annual Meetings said: “Unprecedented joint monetary and fiscal support in response to the pandemic was crucial in limiting production losses but triggered inflation and debt problems. ” She also mentioned that inflationary pressure has transient characteristics, but with upside risks.

Regarding the current global inflation trend, the Trade and Development Report 2021, released by the United Nations Conference on Trade and Development (UNCTAD) said: “The initial economic impact of Covid-19 has was the deep recession and falling inflation. However, since the second half of 2020, due to a combination of the rapid recovery in global aggregate demand and some adverse supply shocks, prices have accelerated in the advanced economies of the world. Rising food prices have contributed to the rise in the global hunger index since the pandemic, with the greatest damage in developing countries. “

Although this is a global phenomenon, local inflation factors in Bangladesh must also be taken into account. In addition, the inflationary pressure induced by the pandemic has taken its toll on people with limited incomes. A policy brief, prepared by the Bank of Bangladesh, revealed that there was a significant impact of Covid-19 on “Bangladesh’s inflation rate in terms of increasing volatility which differs in rural and urban areas…. fluctuations in food inflation are larger than those in non-food inflation. He also mentioned that the non-food component of the CPI showed “higher inflation in transport and communications, spending on medical and health care and lower inflation in clothing and footwear, as well as gross rent. , fuel and lighting “.

So, there is not much to be comfortable with the inflation situation. Bangladesh has now entered the so-called “low growth, high inflation territory”. Both fixed income and low income people have already borne the brunt of inflation. Although the inflation rate fell to 5.36 percent in July, this is a temporary relief. There are indications that inflation could rise again in the near future. In addition to the prudent use of monetary policy tools, more income-generating activities are now needed.

[email protected]


Source link

Comment here

placeholder="Your Comment">