Reportedly, the inflation rate at 7.56 per cent has reached the highest level in 9 years. The common man equates inflation with rising prices while the economist calls it inflation. Whatever the name given to the phenomenon known as inflation in economics, some varieties of it are certainly highly undesirable. However, contrary to the common conception that all forms of inflation are evil, the reality can be otherwise.
Inflation which is driven by demand can be actually beneficial for a large number of players in the economic scene. Businesses may be better off due to it as the expanded demand situation produces the incentive for them to increase production which in turn increases their total profits. During demand-pull inflation, the prices of final goods and services tend to be more flexible in an upwards direction than the prices of many of the factors of production (i.e., prices of raw materials, rent, wages, etc. ) which are fixed on fairly long-term contracts.
Thus, it would not be so much a cause for concern if the current rising inflation rate in Bangladesh seemed to be of the demand-pull type. But this is not the case as the inflation here appears to be of the cost-push type which, if not tamed, has all the potentials of deepening the economic gloom. A recent issue of the London based renowned Economist magazine has assessed the inflation rate in Bangladesh and made a forecast about inflation’s further rise in the country in 2023 which is worrying. Its forecast was that the rate of inflation in Bangladesh could increase further in 2023. Certainly, the inflation forecast contrasts sharply with what had been the rather bearable rate of inflation below 3 per cent for some consecutive years before 2018.
Why the inflation type in Bangladesh is judged as the cost-push one should be obvious. There is hardly a sign that demand for many non essential products are on the rise. Any assessment of the demand situation of non essentials in the market would surely show up a stagnant demand condition for most of these products. The demand for products and services such as food, transportation, etc., that people consider as indispensable are inelastic. The demand for these products or services do not taper off as their prices or charges rise. People in many cases are likely to even incur debt to go on consuming foods in the same quantities notwithstanding the rise in their prices. This inelastic demand situation for essential goods is now being exploited by a class of businessmen in the country who are resorting to the most unethical raising of prices of essential commodities in the sure knowledge that people will buy them in the same amounts and in the same frequency regardless of higher costs.
But the rising prices of essential commodities is cutting into people’s purchasing power and reducing their disposable incomes which, if left uneroded, could create demand for goods and services of the non-essential categories. Thus, the essentials’ markets being costlier, is helping to slacken demand for a large number of goods and services of the non essential categories the demand for which are income elastic.
On the other hand, energy price is central to production activities in different fields. Prices of different forms of energy-electricity, gas and fuel oil-were substantially increased several times during the last three years and another round of increases are being discussed .
Higher energy prices had the unwanted impact of making production processes costlier by increasing one of the most important factor costs of production. Wages, rents and other costs may or may not have been adjusted upwards in this period. But higher energy prices have certainly set the stage for price increases across the board for many commodities, the demand for higher wages, higher rents and increases of charges for services in many areas.
Thus, the ravages of inflation, as a whole, are not only creating distresses for common consumers by whittling their purchasing power and decreasing their propensity to save, the same is also poised to take a toll in the form of reduced investment, loss of competitiveness and adverse balance of payments situation from the macro economy.
Cost-push inflation is never good for the macro economy because its prime casualty are productive activities. When there is cost-push inflation, profits are squeezed and this situation leads firms to decrease production activities as there exists not the same scope for increasing production and profits like under inflation of the demand-pull type. Decrease in production activities and other cost cutting measures can worsen unemployment instead of creating more employment. Economic growth in these circumstances, suffer, giving rise to all the attendant problems of low growth such as less employment creation, less income and no change in the poverty situation which can feed a vicious cycle of continuing stagnating demand in the economy which in turn discourages newer investment activities leading to a static situation in respect of the goal of economic expansion.
Investment activities are the keys to economic growth but these activities are not encouraged because creditors feel reluctant to extend greater credits to investors under inflationary conditions because debtors repay in monetary units which have less purchasing power than those which they borrowed. Or the creditors might increase interest rates or keep them unchanged at a higher level as hedges against inflation. At any rate, the cumulative effect of inflation comes as a damper for investment when investment is the only way to get the economy to expand for the benefits of the same to be experienced at the micro levels.
Furthermore, higher export prices of commodities due to inflation might fetch temporary gains to exporters but the same are likely to disappear in the medium and long terms as the higher priced export products might be considered uncompetitive in relation to other foreign suppliers of the products who could be prepared to supply at comparatively lower prices. Higher prices of domestically produced goods are also likely to cause a decrease in their consumer appeal and increase in the appeal to consumers for products originating from import activity or smuggling. Domestic production may decline from these factors and turn worse the associated problems of unemployment, loss of income and further depression of the demand situation.
Considering all of these factors and more, it is high time for those in charge of economic governance to look at the rising inflation rate as a serious ill which must be treated effectively with no loss of time.
