Inflation, Perspective Bangladesh:
A Trend Analysis Since Independence
1
Sayema Sultana | 2Mohammad Saif Uddin CISA, FCA
Abstract
The study has analyzed the trend and
main determinants of inflation in
Bangladesh using- data for the period from
1971 to March, 2013. For this, the
inflation rates, mainly based on Consumer
Price Index (CPI) and Gross Domestic
Product (GDP) Deflator, are stated in this
report. Some figures are also shown to
make the data more understandable.
Moreover, a brief analysis, without using
any mathematical terms has been done to
describe the reasons of inflation in
Bangladesh. Some strategies are also
recommended to keep the inflation rate
low or moderate. Precisely, it can be said
that, 1970s was an unstable period in the
inflation history of Bangladesh.
1981-1990s was a bit stable with an
average inflation rate more than 10%.
1991-2000 was the most stable with an
average inflation rate of 5.585. Then the
decade 2001-2010 was again faced with
an average inflation of about 6.20%.
Current decade also signals a hazy
scenario of inflation from its beginning.
Introduction
Inflation, a well- entrenched
phenomenon, is considered as one of the
dominant macroeconomic challenges in
the economic world. The general
The Bangladesh Accountant April - June 2013
movement of a country's overall price
level is of primary concern of all and more
so if, the movement is upward. The
problem of inflation has virtually become
a major concern of all
economies-developed and developing.
From the seventies, inflation has been
accelerating at an alarming rate in most of
the developing countries. The problem of
inflation is, in a way, more complex in a
developing country because of financial
and economic dualism and widespread
got eminent control of wages, prices,
exchange rates, imports and exports and
plethora of subsidies and incentives-which
are often misplaced. From the birth of
Bangladesh in 1971, the country has been
through different changes like-lackluster
growth, high incidence of poverty and
persistently high rate of inflation. The
inflationary impulses in particular, not
only worsens the general economic
well-being of the population by eroding
little purchasing power but also increases
social tension and shake the confidence of
the general public in the social and
economic fabric of the country. In this
research, the trend of inflation rates
Bangladesh from 1971 to March, 2013 has
been described in a very compressed
manner. Also, it is being tried to find out
the overall reasons of inflation in
Bangladesh from 1971 in brief.
27
Objectives of the Study
It is mandatory to have few objectives
to make a work successful. From the
very beginning of the study, it has
been tried to conduct the research
with a view to achieve some specific
objectives. The objectives of the
report are given below:
1. To have brief idea about
Inflation.
2. To know the Inflation Rates
Trend of Bangladesh since 1971
to current time (March, 2013).
3. To find out the reasons of
inflation in Bangladesh in a very
brief manner.
4. To suggest some strategies to
keep the inflation rate low or
moderate.
Literature Review
Trend analysis of inflation rates of
Bangladesh since independence till
today (March, 2013), is the main gist
of this report. While a great deal of
reports, articles etc. have been
published on inflation in Bangladesh.
However, review of literature in this
regard has an ample of emphasis in
carrying out further research work.
The research works reviewed here
have been sourced from multifarious
journals, articles, reports, internet
sites etc.
Khatun, Fahmida and Ahamad and
Mazbahul G. (2012) in "Investigating
the determinants of inflationary trends
in Bangladesh: an ARDL bounds F-
Test Approach", have investigated
major determining factors of
inflationary trends in Bangladesh
during the period FY1981 to FY2009.
Empirical result of that report found
that, increased domestic rice
production and effective
fiscal-monetary integration are the
crucial policy options to curb the
inflationary pressure in Bangladesh.
Rahman, Bhattacharya, Shadat and
Deb (2008), in "Recent Inflation in
28
Bangladesh: Trends, Determinants BANGLADESH
and Impact on Poverty" researched
recent trends in aggregate inflation IS THE 50TH LARGEST
levels and analyzed movements in
price levels of a number of essential ECONOMY IN A
items of consumption. Their study
also looked at Bangladesh's inflation SAMPLE OF 177
from a regional comparative
COUNTRIES. AMONG
perspective, made an attempt to
estimate the impact of inflation on THE DEVELOPING
poverty levels based on latest
household income and expenditure COUNTRIES,
data and reviewed various
government interventions to address BANGLADESH HAS
both causes and consequences of
inflation. GROWN FASTER
Ahmed and Mortaza (2005) in their WITH BIGGER GDP
paper "Inflation and Economic
VOLUMES SINCE THE
Growth in Bangladesh: 1981-2005",
empirically explored the relationship EARLY 1990S. HIGHER
between inflation and economic
growth in the context of Bangladesh. PER CAPITA GDP HAS
The empirical evidence demonstrated
a statistically significant long-run LED TO THE
negative relationship between
inflation and economic growth for the CREATION OF EXCESS
country as indicated by a statistically
significant long-run negative DEMAND IN THE
relationship between CPI and real
ECONOMY OF
GDP.
BANGLADESH,
However, the report "Inflation,
Perspective Bangladesh: A Trend WHICH HAS PAVED
Analysis since Independence", the
researchers believe, is a constructive THE WAY OF
and informative addition amongst the
research works done in the arena of DEMAND-PULL
inflation trend analysis of Bangladesh.
INFLATION.
Problem Statement
The research process begins with
problem discovery, and identifying
the problem is the first step of the
research process. The formulation of
a problem is often more essential
than its solution. Bangladesh, like
other countries of the world faces
inflation from its birth. The inflation
rates mainly based on Consumer
Price Index (CPI) and GDP Deflator
have been stated in this report.
Moreover, a brief analysis without
using any mathematical terms has
April - June 2013 The Bangladesh Accountant
been done to describe the reasons
of inflation in Bangladesh.
Methodology
Research is the systematic
collection, analysis, and
interpretation of data. The
chronological selection of methods
for a particular research is called
research methodology. The
methods which have been selected
for this research is given below:
Research Design
This research is a descriptive
research. This report basically
states the inflation rates of
Bangladesh since its independence
and a very brief analysis of the
trend. There are no mathematical
or statistical tools used in this
research. No survey has been
done. But, informal interviews
have been conducted to collect
data about the reasons of inflation
in Bangladesh.
Data Collection Methods
For completing the research
according to its objectives, data
The Bangladesh Accountant
has been collected from the
secondary sources. Relevant
information has been collected
from Statistical Yearbook of
Bangladesh, Economic Trends,
Bangladesh Bank Bulletin,
Bangladesh Arthanaitic Jarip,
Bangladesh Arthanaitic Samikhaya,
Annual Report of Bangladesh
Bank, Statistical Pocket Book of
Bangladesh,CPD, IMF and from
different published books, journals
and Ph.D dissertations and
research works that are relevant to
the study. Also, expertise
knowledge has been utilized for
better understanding about
different terms.
Data Analysis: After gathering the
data from different secondary
sources, these data have been
described systematically. Some
figures are shown to make the data
more understandable.
Limitations of the Research
Best efforts have been given by the
authors to fulfill the report's
objectives perfectly. The
inescapable limitations of the
research are stated below:
April - June 2013
• It is near to impossible to
analyze more than forty two
years' inflation rates of
Bangladesh in this brief report
• Unavailability of some data
• Limited knowledge of the
researchers
An Overview of Inflation
Definition of 'Inflation'
"Inflation is always and
everywhere a monetary
phenomenon" so wrote Milton
Friedman. In economics, inflation
is a rise in the general level of
prices of goods and services in an
economy over a period of time.
When the general price level rises,
each unit of currency buys fewer
goods and services. Consequently,
inflation also reflects erosion in the
purchasing power of money — a
loss of real value in the internal
medium of exchange and unit of
account in the economy. A chief
measure of price inflation is the
inflation rate, the annualized
percentage change in a general
price index (normally the
Consumer Price Index) over time.
29

History of Inflation
From the second half of the 15th
century to the first half of the 17th,
Western Europe experienced a
major inflationary cycle referred to
as "Price Revolution", with prices
on average rising perhaps six fold
over 150 years. It was thought that
this was caused by the increase in
wealth of Habsburg Spain, with a
large influx of gold and silver from
the New World. The spent of
silver, suddenly spread throughout
a previously cash starved Europe,
caused widespread inflation.
Demographic factors also
contributed to upward pressure on
prices, with European population
growth after depopulation caused
by the Black Death Pandemic.
By the nineteenth century,
economists categorized three
separate factors that cause a rise or
fall in the price of goods: a change
in the value or resource costs of
the goods, a change in the price of
30
money which then was usually a
fluctuation in the commodity price
of the metallic content in the
currency, and currency
depreciation resulting from an
increased supply of currency
relative to the quantity of
redeemable metal backing the
currency. Following the
proliferation of private bank note
currency printed during the
American Civil War, the term
"inflation" started to appear as a
direct reference to the currency
depreciation that occurred as the
quantity of redeemable bank notes
outstripped the quantity of metal
available for their redemption.
This relationship between the
over-supply of bank notes and a
resulting depreciation in their
value was noted by earlier classical
economists such as David Hume
and David Ricardo, who went
through the examination and
debate to, 'what effect a currency
devaluation (later termed monetary
April - June 2013
inflation) has on the price of goods
(later termed price inflation, and
eventually just inflation).'
The adoption of fiat currency
(paper money) by many countries,
from the 18th century onwards,
made much larger variations in the
supply of money possible. Since
then, huge increases in the supply
of paper money have taken place
in a number of countries,
producing hyperinflations--
episodes of extreme inflation rates
much higher than those observed
in earlier periods of commodity
money. The hyperinflation suffered
by the Weimar Republic of
Germany is a notable example.
Two Major Types of Inflation
• Demand-Pull Inflation or
Excess Demand Inflation:
Demand-pull inflation is asserted
to arise when aggregate demand in
an economy outpaces aggregate
supply. It involves inflation rising
as real gross domestic product rises
and unemployment falls, as the
economy moves along the Phillips
curve. This is commonly described
as "too much money chasing too
few goods". More accurately, it
should be described as involving
"too much money spent chasing
too few goods", since only money
that is spent on goods and services
can cause inflation. This would not
be expected to happen, unless the
economy is already at a full
employment level (Wikipedia,
2013).
Demand-pull inflation happens as
aggregate demand (AD) increases
in an economy and intersects the
short run aggregate supply curve
(SRAS) to the right of where SRAS
and long run aggregate supply
(LRAS) cross. This causes some
inflation to occur in the short run,
and even more in the long run as
the economy adjusts (and the labor
The Bangladesh Accountant
market moves back to (increased growth/income Disinflation - a decrease in the
equilibrium). Demand-pull expectations). rate of inflation;
inflation can occur for a reason that Hyperinflation - an out-of-control
causes AD to increase but the most • Cost-Push Inflation: inflationary spiral;
common are expansionary fiscal Stagflation - a combination of
and monetary policy, and positive Cost-push inflation occurs when inflation, slow
expectations about the future there is a shortage of supply of economic growth
and high
unemployment
AS AD Graph Reflation - attempts to expand
a country's output
AS and curb the effects
P of deflation.
r
i Reflation policies
c can include
e
L reducing taxes,
e changing the
v The price level going up AD’
e money supply and
as a result of an increase
l in AD demand pull
AD
lowering interest
inflation. rates.
Real GDP
Measures of Inflation

Figure: 1: Demand-Pull Inflation Since there are many possible

labor, raw materials or capital. The long run as the labor market measures of the price level, there
demand remains the same, but adjusts back to equilibrium (with are many possible measures of
since there are fewer goods or wages dropping). price inflation. Most frequently, the
services, the supplier can charge term "inflation" refers to a rise in a
more per unit. As the cost of The price level going up as a result broad price index representing the
production increases, the firms will of a decrease in AS is called cost overall price level for goods and
reduce supply. Cost-push inflation push inflation. services in the economy. The
happens as SRAS shifts to the left Consumer Price Index (CPI), the
(decreases) and intersects the AD Concepts Related to Inflation Personal Consumption
curve to the left of where AD and Expenditures Price Index (PCEPI)
LRAS cross. This will cause Deflation - a fall in the general and the GDP deflator are some
inflation in the short run, but prices price level; examples of broad price indices.
will drop back down again in the However, "inflation" may also be
used to describe a rising price level
within a narrower set of assets,
goods or services within the
AS AD Graph economy, such as commodities
AS’ (including food, fuel, metals),
AS financial assets (such as stocks,
P
r bonds and real estate), services
i (such as entertainment and health
c
e care), or labor. The Reuters-CRB
L Index, the Producer Price Index
e (PPI), and Employment Cost Index
v The price level going up
e as a result of an increase (ECI) are examples of narrow price
l in AD demand pull indices used to measure price
inflation.
AD
inflation in particular sectors of the
Real GDP economy. Core inflation is a
measure of inflation for a subset of
consumer prices that excludes food
Figure: 2: Cost-Push Inflation
and energy prices, which rise and

The Bangladesh Accountant April - June 2013 31

fall more than other prices in the
short term.
Effects of Inflation
Positive
• Central banks can adjust
nominal interest rates
(intended to mitigate
recessions)
• As the rate of inflation rises
debt relief through reduction
in real level of debt
Negative
• A decrease in the real value of
money and other monetary
items over time
• Uncertainty over future
inflation may discourage
investment and savings
• High inflation may lead to
shortages of goods, if
consumers begin hoarding out
of concern that prices will
increase in the future
• Middle class and lower class
people suffer most as inflation
increases. Their standard of
living goes downturn with the
acceleration of inflation.
economists favor a low steady rate
of inflation. Low (as opposed to
zero or negative) inflation may
reduce the severity of economic
recessions by enabling the labor
market to adjust more quickly in a
downturn. The task of keeping the
rate of inflation low and stable is
usually given to monetary
authorities. Generally, these
monetary authorities are the central
banks that control the size of the
money supply through the setting
of interest rates, through open
market operations, and through the
setting of banking reserve
requirements.
Controlling Measures of Inflation
1) Monetary policy
2) Fixed exchange rates
3) Gold standard
4) Wage and price controls
5) Cost-of-living allowance
Analysis
Bangladesh gained independence
on 16 December, 1971. The
country went through a turbulent
period of economic and political
crisis during 1974-1975. This was
in the midst of a historically high
inflation of about 40 percent per
annum during 1972-1975. The
hyperinflation was caused
primarily by supply-side
dislocation and shortages.
During the period of 1970s, the
yearly average growth rate of
broad money was recorded at
17.70%. Throughout the 1970s,
both selective and quantitative
credit control measures were
adopted to provide adequate credit
to the state owned enterprises and
other priority sectors to achieve the
government's development
objectives at the cost of inflation.
Average inflation in 1970s was
16.76%.
From the figure: 3, it is visible that
in 1971, the inflation rate was very
low (2.96%). But it must be
mentioned here that, it was the
liberation war period of
Bangladesh. The war started in
March and ended up with the
victory in December, 1971.
In 1972, the year just after the war
the rate of inflation was also very
low (4.4%). In that year, taka was

Main Causes of Inflation

Trend analysis of inflation in Bangladesh: (1971-1980)
Economists generally agree that
high rates of inflation and
hyperinflation are caused by an Inflation Rates
excessive growth of the money 90
supply. Views on which factors
80
determine low to moderate rates of
inflation are more varied. Low or 70
moderate inflation may be 60
attributed to fluctuations in real 50
demand for goods and services, or 40
changes in available supplies such
30
as during scarcities, as well as to
growth in the money supply. 20
However, the consensus view is 10
that, a long sustained period of 0
inflation is caused by money 1971 1982 1973 1974 1975 1976 1977 1978 1979 1980
supply growing faster than the rate
of economic growth. Source: International Monetary Fund - 2009 World Economic Outlook
Today, most mainstream Figure: 3: Inflation Rates of Bangladesh from 1971-1980 (based on GDP Deflator)

32 April - June 2013 The Bangladesh Accountant

linked to pound sterling with
devaluation of taka by 33%.
(£1=Tk. 18.9697). And it is a
known factor that, when
devaluation occurs, it brings
inflation through international
trades and links.
The after effect of war started in
1973 with an inflation rate of
61.41%. Because of the war, the
total infrastructure of the country
was damaged and also, it was
natural for a newly born country
faced with nine months of war.
Available studies suggest that, the
main source of high inflation of the
period was excessive money
supply growth in a war-ravaged
economy (Hossain, 1995, 2000).
1974 was a very crucial time for
Bangladesh. The country was
already damaged because of the
war. On the other hand a
devastating flood hit the country in
that year. The agricultural product
distribution system was already
unstable and at that time flood
drew the situation to its worst.
Agricultural production was almost
damaged. In the line of destruction
a severe famine also started in that
year, because of scarcity of foods.
Inflation rate became 44.54%. The
price of rice (the staple food of
Bangladesh) became Tk. 22 per kg
which was around only Tk.1.50
per kg before.
Bangladesh faced Galloping or
Hyper inflation of 80.57% in the
year of 1975. It was the worst price
hike the country ever faced with.
Because of the famine and flood
the situation was already badly
shaken. The scenario got worse
because of the denial of the
government of PL-480 conditions
in 1974. Because of that denial,
UN's aid ship from USA was
returned back, the country was left
with more bad luck. The political
instability was another reason for
economic instability. In that year,
The Bangladesh Accountant
the then President, Sheikh Mujibur rate rose to 17.56%. Overall, this
Rahman was killed. Moreover, decade showed the most unstable
again Tk. was devaluated by 85% trend of inflation rates in
(£1=Tk. 30). Beginning in late Bangladesh.
1975, the government gradually
gave greater scope to private sector Analysis
participation in the economy, a
pattern that was continued. On the economic front, there was
Inefficiency in the public sector a modest breakthrough during the
was improving however at a mid-1980s. The economy started to
gradual pace, external resistance grow at a steady pace of about 4.5
for developing the country's richest percent per annum (Hossain, 1995,
natural resources, and power 1996).Therefore the 1980s and the
sectors including infrastructure 1990s represent a phase of
have all contributed to slowing moderate inflation and a relatively
economic growth. high economic growth.
Because of different policies taken During the period of 1980s, the
in 1975, the situation started to get yearly average growth rate of
stabilize in 1976 under the then broad money was recorded at
government. Aids from different 21.59 percent. This steep rise in
countries started to come and also money supply was backed by
the government started to reform sectoral credit policy and easy
the system. The inflation rate was refinancing facility of the monetary
decreased to 17.63%. The inflation authority. Average inflation in
rate became very low in 1977 1970s was 16.76 percent, which
(3.21%), because of constructive went down to 10.18 percent in the
government policies, especially in 1980s.
the agricultural system. Again the
inflation rate started to grow from Up to 1980s, the deposit and
1978(25.62%). lending rates were administered
interest rates. During that period,
In 1979, it was controlled down to interest rates were revised rarely to
12.56% and in 1980, the inflation adjust to inflation.
Trend Analysis of Inflation in Bangladesh (1981-1990)
Inflation Rates
16
14
12
10
8
6
4
2
0
1981 1982 1983 1984 1985 1986 1987 1988 1989 1990
Source: International Monetary Fund - 2009 World Economic Outlook
Figure: 4: Inflation Rates of Bangladesh from 1981-1990 (based on CPI)
April - June 2013 33
During the first half of the 1980s started to stabilize with different urban and rural areas were 5.05
the country experienced a policies of democratic per cent and 5.71 per cent
double-digit episode of inflation governments. respectively.
while the growth rate of GDP was
below 4 percent. Following the launching of a series The average inflation rate in the
of comprehensive stabilization latter half of the 1990s was
In the mid-1980s, there was measures, the economy of somewhat high but under
encouraging signs of progress. Bangladesh mostly restored both double-digit level. Even during the
Economic policies aimed at robust economic growth and flood year (FY99) the national
encouraging private enterprise and macro-economic stability in early inflation rate did not rise to
investment, privatizing public 1990s from the backdrop of the double-digit level. Although the
industries, reinstating budgetary deep macro-economic crisis of the rate remained under double-digit
discipline, and liberalizing the period since independence level, the inflation rate indicated an
import regime were accelerated. (Bhattacharaya, 2004). upward trend after FY97 just for
one year. But the rising trend in
On a whole, the inflation rates did In 1990-91, 1994-95, 1998 spikes inflation during FY99 was
not fluctuate much in that decade in the trend line were above 8% corrected during FY00 with the
and illustrated a downward trend. (Figure: 5), which were driven by record 'aman' harvest in that year.
Government agreed with different the natural calamities and supply Regional export bans for rice and
conditions to get aid from abroad. shocks. procurement of rice from domestic
Agricultural sectors and and international markets and
infrastructure of the country were Although macro-economic stability selling them in the open market,
getting developed. The supply of programs and structural adjustment enabled the government to handle
goods was sufficient. The moderate processes started in the middle of the situation wisely.
inflation occurred mainly because eighties, but due to various
of money supply imbalances. repression prevailing in the Since the adoption of the 'Financial
economy, financial liberalization Sector Reform Program' in 1990,
Analysis started in earnest in the 1990's. the policy stance shifted toward
indirect control. The growth of
In 1991, a democratic government, At the first half of the 1990s, the broad money was maintained at
Bangladesh Nationalist Party (BNP) national inflation rate on average levels consistent with real output
and in 1996 another democratic was 6.58 per cent, while the growth and moderate inflation
party Bangladesh Awami League inflation rates for the using indirect monetary
came to power. The economy abovementioned period for the instruments. Money supply
registered a lower yearly average
growth of 12.90 percent in the
Trend Analysis of Inflation in Bangladesh (1991-2000) 1990s. The yearly average inflation
declined to 5.69 percent during the
Inflation Rates same period.
12 Interest rates were controlled in
this decade. In order to introduce
10
market based interest rate system, a
8 new interest rate policy was put in
place in early 1990. Under this
6 policy, banks were allowed to
determine their interest rates for
4 both deposit and lending. Initially
Bangladesh Bank used to prescribe
2 the interest rate bands for different
categories of lending. And the
0
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 banks were allowed to move freely
within the bands. Gradually the
Source: International Monetary Fund - 2009 World Economic Outlook interest rate bands for lending were
Figure: 5: Inflation Rates of Bangladesh from 1991-2000 (based on CPI) widened and ultimately withdrawn

34 April - June 2013 The Bangladesh Accountant

in April 1992, except three priority introduction of primary dealership the base rate of 1.66% (June '01),
sectors (agriculture, export and system, were taken to activate the the inflation rate gradually
small and cottage industries). secondary market for government increased to 1.908% in December,
Interest rate bands for lending to treasury bills/bonds. To establish a 2001. This crawling increase in the
agriculture and small and cottage high-tech standard transaction inflation rate was underwritten by
industries were lifted in August mechanism for various government the increase in the non-food price
1999. bills/bonds in primary and index in both the rural and urban
secondary markets, an on-line areas. However, during the same
'30-Day Bangladesh Bank Bill' was system was introduced. period the food component of the
also introduced in 1995. Until index remained steady in both the
1997, Bangladesh Bank Bills were Overall this decade showed areas.
bought and sold through auctions significant fluctuations of inflation
as a part of its open market rates in Bangladesh within around From 2004, inflation started to
operation. 'Repurchase Agreement' 10%. increase (6.103%), because
(Repo) and 'Reverse Repo' were government wanted to encourage
introduced for banks and financial Analysis local investment and decreased the
institutions as indirect monetary lending interest rate from 16% to
policy tools for day-to-day liquidity In the inflation history of 14.75% and further in 2005 at
management in response to Bangladesh, 2001 was the year of 14%. As a result, people started to
temporary and unexpected lowest inflation rate of only take loan and invest, and inflation
disturbances in the supply and 1.908%.During the first three years rate started to rise, as people had
demand for money. Repo auction of the new decade, the average liquid money in their hand. That's
enables banks to place bids for national inflation rate observed why; government long term policy
funds collateralized by treasury 3.03 per cent with very low level to develop local industry was
bills. The inflow of liquidity with of food inflation rate at 2.38 per curbed by increasing the lending
Repo operations helped in easing cent. Such a sustained low level of interest rate and also the deposit
seasonal volatility in the call inflation was possibly dictated by rate from 2006 to control the
money rate and stabilized the the low level of food grain prices, inflation as election was knocking
money market. To encourage and ensured by successive good at the door then.
facilitate inter-bank Repo harvests. Incidentally, early data on
operations with same day FY02 indicates a marginal increase According to the Bangladesh
recording of the transfers of in the inflation rate (3.719). From Bureau of Statistics, the overall
securities, steps, such as the inflation in Bangladesh was
9.111% in 2007 (Figure: 6);
Trend Analysis of Inflation in Bangladesh (2001-2010) whereas the food-inflation hit
13.83 percent in the same period.
Apart from global commodity
Inflation Rates boom, some internal factors such
as drive against corruption, crop
10 loss due to natural disasters, the
9 Bangladesh Bank's (BB) exchange
8 rate policies, and the expansion of
7 broad money (M3) and credit
6 exacerbated the price hike of
5 primary commodities in
4 Bangladesh in the last decade.
3 Moreover, in the last years of the
2 last decade, food grain production,
1 except for Boro (high yielding
0
variety), was stagnant owing to the
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 sluggish 3 performance in the
country’s agriculture sector.
Source: International Monetary Fund - 2010 World Economic Outlook
Figure: 6: Inflation Rates of Bangladesh from 2001-2010 (based on CPI)

The Bangladesh Accountant April - June 2013 35

External factors also contributed to
the inflation (2001-2010) in
Bangladesh. As Bangladesh is not
self-sufficient in terms of food
production, the country depends
on external markets for I cereals
(particularly wheat and rice), pulse,
edible oil, milk-products and other
essentials. Crop failures due to
erratic weather (abrupt behavior of
South Asian monsoon, wrath of El
Nifio and La Nifia, damages caused
by cyclones, etc.,) often create
food shortages in Bangladesh.
A sharp depreciation of the BDT
vis-a-vis the USD and the excess
supply of money in the market are
also believed to heighten the
inflationary pressures. The period
average BDT-USD exchange rate
was recorded at 61.39 during FY05
in comparison to 40.20 and 50.31
during FY95 and FY00
respectively.
Unfair cartel among the suppliers
might seriously hamper the course
of the economy by engendering
inflation via the creation of a false
supply shortage even during a
period of robust growth in
production. Such an undesirable began to show up since the second
event allegedly occurred in FY06 quarter of FY2010 continued
when the food ‘V’ inflation throughout FY2011 and FY2012.
remained high (7.76 percent) in the
same fiscal year despite the growth From the bar chart (Figure: 7)
in food production (4.49 percent shown above, two digits inflation
vis-a-vis 2.21 percent in FY05). can be seen throughout the year of
Monopolistic control of several 2011 except the month of October,
food items such as sugar, onion, 2011. February 2012 was the worst
pulses and edible oil by market of all with 11.59% inflation rate. At
syndication seems to have led this the same time, it can be seen from
situation. Obviously such the figure that, it was decreased up
manipulation is a type of supply to November, 2012 and again
side disturbance. started to increase and the inflation
rate of March'2013 was 7.87%.
Hence, this decade depicted an
upward trend of inflation rates with Food inflation reached to 13.75%
some fluctuations. in September 2011 as opposed to
9.72% in September 2010 (CPD,
Analysis 2011). According to the
Bangladesh Bureau of Statistics
Bangladesh has started another (BBS), point-to-point inflation rose
decade with double digit inflation to 11,97% in September 2011 and
of 10.49% in January 2011. With food inflation increased to a level
the turnaround of the global more than what policy analysts had
economy from the recession forecasted, due to higher food and
towards the end of 2009 and oil prices. Such high food inflation
beginning of 2010, inflation started contributed more to the overall
to shoot up. This trend was also national inflation.
observed in Bangladesh. In 2011 Another crucial point regarding the
the average inflation rate was recent inflation is that, rural food
8.85%. High inflationary trend that inflation has been closer to urban

Trend Analysis of Inflation in Bangladesh (January 2011-March 2013)

Bangladesh Inflation Rate

Annual Charge on Consumer Price Index

12 11.53 11.59
12
11.42
11.29
10.96
11 10.67 10.63 11
10.49 10.43
10.2 10.17 10.1
9.93
10 10
9.15
9 9
8.56
8.03 7.93
8 7.87 8
7.69
7.39 7.41 7.38
7.22
7 7
Jul/11 Jan/12 Jul/12 Jan/13

Source: Bangladesh Bureau of Statistics 2013, Trading Economics

Figure-7: Inflation Rates of Bangladesh from January, 2011-March, 2013 (based on CPI)

36 April - June 2013 The Bangladesh Accountant

food inflation. Bangladesh has
never faced so, until August, 2010.
Inflows of remittance, rise in
agricultural production, increase in
labour wages, expanding social
safety net programme etc. have
raised the purchasing power of the
rural people. This is giving added
pressure in the inflation rate.
The average inflation rate of the
year 2012 was 8.8%. The inflation
rate declined to 9.9 per cent in
May, 2012. The lower
international food price has been
the main reason behind the lower
rate of food inflation for a
considerable period of time until
recently in Bangladesh whereas
non-food inflation has been
increasing. Fuel import, energy
price hike and Taka's devaluation
against the US dollar have
combined to increase Bangladesh's
non-food inflation. Food inflation
has also increased, although not by
the same amount. In recent months
changes in the supply side has
been as much of a factor in raising
the inflation rate as changes in the
demand side. Average inflation is
showing downward trend over the
past few months as the monetary
policy and other macroeconomic
mechanism started working in the
right direction. According to BBS, a
jump in prices of rice, pulses, flour,
fishes and other items pushed food
inflation higher. Twelve month
average food and non-food
inflation came down to 7.10
percent from10.44 percent —
resulting general inflation down to
7.38 percent in February, 2013.
However, inflation rates of
Bangladesh, from the beginning of
this decade are showing a
downward trend till March, 2013.
Substantial debate is still going on
among economists regarding the
causes of inflation. In Bangladesh
economy, a series of incidents
occurred over couple of years
prompting researchers to recognize
the significant causes of inflation in
Bangladesh. Inflation rates from
1971 to 2012 are shown in the
following figure to have a look on
the forty-two years inflation rate
trend.
The overall general reasons behind
fueling inflation in Bangladesh are
stated below in brief.
• International Price Hike
Several factors have induced the
rise in fuel and non-fuel
commodity prices in international
markets. First, the demand for
primary commodities has increased
tremendously from major emerging
economies in recent years.
Secondly, increasingly more staple
foods and oil seeds are being
channeled toward bio-fuel and

Analysis on the Overall Reasons of Inflation in Bangladesh (1971-March. 2013)

Inflation Rates
90

80

70

60

50

40

30

20

10

0
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012

Source: International Monetary Fund - 2013 World Economic Outlook

Figure: 8: Inflation Rates of Bangladesh from 1971-2012

The Bangladesh Accountant April - June 2013 37

bio-diesel production. Thirdly,
crop failures due to bad weather in
some parts of the world have also
caused the increase in cereals'
prices. Fourthly, oil price hike in
recent years is widely blamed for
inter alia supply disruptions in the
Middle East and the Gulf of
Mexico. Fifthly, increasing
transportation cost (due to oil price
hike) is also playing a part in
raising the prices of essential
goods. Last but not least, following
the US subprime crisis, current
turmoil in the financial markets
around the world has prompted
investors to put their money on
commodity markets.
As today is an age of globalization,
Bangladesh is getting affected by
the international inflation through
different channels.
• Money Market Operations
Central banks around the world
play a key role in managing prices
and formulate monetary policies. It
can be added here that, contrary to
the BB's restrained monetary
policies, both broad money and
credit aggregates have also
contributed to high inflation.
• Food Inflation
The fluctuation in food inflation is
another crucial reason. Since
Bangladesh is an
import—dependent country, a
positive relationship is expected to
exist between world food prices
and domestic inflation. Therefore,
it is natural that rise in world food
prices would influence overall
inflation in Bangladesh.
• Non Food Inflation
The non-food inflation is also
moderately affecting the inflation
situation in Bangladesh.
38
• Labor Cost
Wage, the labour cost, is often
seen as the key reason behind
cost-push inflation. Wage increase
without any commensurate
increase in productivity kicks off a
wage-price spiral, allowing for
sustained inflation. In Bangladesh,
the wage inflation has been pretty
stable at above 5 percent per
annum with some short-term
fluctuations over the period from
July '03 to June '06. Under the
assumption of little or no
improvement of workers'
productivity growth, wage inflation
at such high level is an indication
of cost escalation over time.
However, whether the accelerated
cost has translated into inflation is
not clear. It, therefore, appears that
wage inflation cannot be a
dominant factor in explaining the
price behavior in Bangladesh. This
is what one would normally expect
in a labor surplus environment.
• Exchange Rate
Some of the policy makers and
researchers believe that the
depreciation of the exchange rate
is the primary cause of rapid
inflation in Bangladesh. Exchange
rate exerts inflationary pressure
mainly via import prices.
Historically, exchange rate in
Bangladesh exhibited steady
increase over time. Among
supply-side factors, exchange rate
is found to be significant in
explaining inflation in Bangladesh.
A depreciation of exchange rate
translates into a rise in the cost of
imported commodities by making
foreign goods more expensive, and
thus induces an increase in the
domestic price level. There is a
close association between
exchange rate fluctuations and
inflation.
Exchange rate depreciates =>
increases the prices of imported
April - June 2013
commodities =>increases the
inflationary rate.
• The relative strength of
Bangladesh currency
The relative strength of Bangladesh
currency in relation to the
neighboring country India should
also be a considerable point
regarding inflation scenario of
Bangladesh. The Bangladeshi taka
has depreciated to some extent
against its intervention currency,
US dollar, over the past several
years. But the Indian rupee has
depreciated higher than that. As a
result, the relative position of the
Bangladesh currency has suffered,
having its impact on the economy
because India is Bangladesh's
major source of import, through
both formal and informal channels.
Imports from India in recent years
constitute more than 20 per cent of
Bangladesh's total imports,
comprising many essential food
items.
• Oil Price
Being a fundamental input of
production, oil constitutes a
significant portion of production
cost in every sector of the
economy. However, an increase in
the diesel price stimulates inflation
via increases in both food and
non-food prices in both urban and
rural areas. This is plausibly due to
the fact that diesel is used
intensively regardless of sector
(food or non-food, urban or rural).
The high prices of fuels lead to
high cost for irrigation, which
raises the cost of agricultural
production; and, high fuel prices
increase the cost of transportation,
which also raises the prices of
essential items transported from
remote villages to urban areas.
• Supply Shortage
Production in agriculture and
The Bangladesh Accountant
fisheries sectors in Bangladesh is
still subject to the whims of nature
to a notable extent. Supplies are
often disrupted by natural
calamities and other reasons. It has
been claimed by many economists
that supply shortage is one of the
main causes of the high inflation in
Bangladesh.
• Non-competitive market
behavior (market syndicate):
The problem of high inflation in
Bangladesh is not only due to
demand-supply gap of some
essential food items but also
because of imperfect market
conditions. Market syndicate
argument goes like this:
Concentrated market power price
fixing (above the competitive level)
inflation
• Growth of money supply
'The Quantity Theory of Money'
leads to agree that, the growth in
the quantity of money is the
primary determinant of the
inflation rate. The excessive growth
of money supply (M2) causes rising
inflation by generating excessive
pressure of demand in the
economy of Bangladesh.
• Policy Implications
The above analysis carries an
important signal for the policy
makers. On the fiscal side,
although cutting down of the
indirect tax on commodities is
often proposed as a remedial
measure, it only makes a
temporary contribution to reduce
inflation. Long term continuation
of such policy may cause
continuous erosion of the
government exchequer. Some also
argue in favor of government
control on wage increases that are
not supported by the
corresponding increase in
The Bangladesh Accountant
productivity to resist wage-price
spiral. In Bangladesh, however, the
presences of powerful trade unions
tend to render the implementation
of such control almost impossible.
Government policy of high
borrowings from banking sectors
also contributed a lot on inflation
level.
• Increased inflow of workers'
remittances
Money supply has been rising at a
rapid rate due to accumulation of
foreign exchange reserves. A
robust growth of exports and a
sharp increase in the flow of
workers' remittances have made
the price level go upward.
• High GDP growth
Bangladesh is the 50th largest
economy in a sample of 177
countries. Among the developing
countries, Bangladesh has grown
faster with bigger GDP volumes
since the early 1990s. Higher per
capita GDP has led to the creation
of excess demand in the economy
of Bangladesh, which has paved
the way of demand-pull inflation.
• Inflation inertia
Inflation inertia is found to have
significant effect on inflation. A
month's inflation contains the
influence of all previous months'
shocks, which form inertia for the
following month. For example, the
domestic market takes time to
adjust to the falling prices of
commodities in the international
market.
Needed Strategies
World hunger is increasing day by
day. Furthermore, climate change
might change the global food
production map substantially
where Bangladesh is predictably
the net loser, as climate change
April - June 2013
poses severe risk to the country's
agriculture production.
Consequently, Bangladesh needs
to adopt both long-term and
short-term strategies to cope with
the global commodity boom. The
above analysis suggests that both
demand and supply side factors
constitute the sources of the recent
inflation in Bangladesh. Based on
these facts, the chance of declining
high inflationary trend in
Bangladesh is less in the near
future. In order to keep inflation
under control, the government has
already taken some measures.
However, the government needs to
take more practical measures to
reduce the price spiral. This paper
makes some recommendations that
are divided into demand-side and
supply-side policy measures.
Demands-Side Policy Measures
• To dilute inflationary pressure
in the economy, the growth of
broad money should be in
line with the estimated real
GDP growth.
• As the government borrowing
from non-bank sources is
mainly non-inflationary, the
government may prefer to
borrow more from non-bank
sources (national savings
schemes) by re-introducing
some long-term savings
schemes as were in force
earlier.
• Measures may be taken to
make the exchange rate
responsive to that of
neighboring countries, by
shunning the interventionist
exchange rate policy of
Bangladesh Bank.
• The growth of reserve money
arising from reserve
accumulation may be offset
by sterilization. Bangladesh
Bank may sell government
39
securities for which it will have to
pay interest.
• An increase in reserve
requirement can raise
reserve-deposit ratio and thus
lowers the money multiplier
and the money supply.
Supply-Side Policy Measures
Short-term Measures
• Our food grain stock
management should also be
improved in order to tackle
inflation. Due to inadequate
storage capacity and
technology, high stocks have
led to high wastage. The
government should maintain
sufficient buffer stock of food
grain (rice and wheat) in kind
of shocks. This will instill
confidence in people.
• The existing information
dissemination system on the
prices of essential
commodities may be
strengthened by using
electronic and print media.
• The surveillance on the part of
the government may be
enhanced through weekly
monitoring of domestic and
international prices of
essential commodities.
• To inject competition in the
market, the government
should promote small and
medium traders along with
big importers for import of
essential commodities, and
help them to get credit from
commercial banks.
• The existing Public Food
Distribution System (PFDS)
including, Targeted Food
Transfer Programs, ration sale
to Essential Priority (EP) and
Other Priority (OP) groups
and Open Market Sale (OMS)
40
program, is too small (about 7% of
food grain requirement) to
make any impact on the
prices of essential food items.
Therefore, the government
should expand PFDS to the
people worst affected by price
spiral.
Medium/Long-term Measures
• The government should
promote the establishment of
producers' cooperatives,
which will work towards
ensuring fair prices of their
products, and at the same
time help eliminate
unnecessary agents in the
supply chain. This will help
stabilize the market price.
• Nature has blessed
Bangladesh with the most
important resource i.e ‘The
Fertile Soil'. More investment
in the agriculture sector is
needed to undertake research
and extension work in order
to invent/upgrade modern
technology to boost
agricultural production,
strengthen capacity in storage,
marketing and management
along with setting up of
agro-based industries.
• The government should use
the experience of Trading
Corporation of Bangladesh
(TCB) by strengthening its
capacity with skilled
manpower to break up any
collusive oligopolistic power
exercised by the private sector
and thus improve the
competitiveness of the
distribution network.
• The BB's credit, interest rate
and exchange rate policies are
crucial to check inflation.
When BDT is undervalued,
the country buys some degree
of inflation from abroad,
April - June 2013
however, a large appreciation of
the BDT might not be a
feasible option at this stage as
such a move might disrupt the
country's export sector and
labor market. Nevertheless,
the BB should allow modest
appreciation of the BDT so
that it can play at least a small
part in mitigating the
currency-induced inflation.
Thus an over-arching coordinated
policy is required in order to tackle
the rising inflationary trend.
Conclusion
A low rate of inflation is one of the
cornerstones of macroeconomic
stability of an economy. From its
birth, Bangladesh faced different
rates of inflation in different
decades. Precisely, it can be said
that, 1970s was an unstable period
in the inflation history of
Bangladesh. 1981-1990s was a bit
stable with an average inflation
rate around 10%. 1991-2000 was
the most stable with an average
inflation rate of 5.58%. Then the
decade 2001-2010 was again faced
with an average inflation rate of
about 6.20%. Current decade also
signals a hazy scenario of inflation
from its beginning.
Bangladesh Bank has been
pursuing an accommodative
monetary policy to achieve growth
and reduce inflation. However,
given the persistent nature of high
inflation, it has also increased cash
reserve ratio (CRR), repurchase
agreement (repo) and reverse repo
a number of times. The fact is,
such contradictory policy has not
been effective to curb the
demand-led inflation. Various
safety net programs, particularly
Vulnerable Group Development,
Food for Work and Open market
Sales of rice are helping to cushion
the impact of high inflation on
The Bangladesh Accountant
poor households. Hossain (2010)
argues that inflation instability in
Bangladesh is an outcome of
wrong monetary policy design and
implementation. Inflation caused
by changes on the supply side of
the market would remain mostly
unaffected by the policies
recommended by the IMF and
undertaken by the Bangladesh
Bank. Unstable political
environment is another big issue in
this regard. Therefore, the
government should take exigent
feasible strict measures according
to the inflation situation of
Bangladesh under the
consideration of the global world.
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The Authors are

1
Freelancer Researcher
2
Fellow Chartered Accountant of ICAB and Certified Information Systems Auditor

42 April - June 2013 The Bangladesh Accountant