A Plea for Moderate Inflation and its Policy Backup By -Md. Nadim Uddin

Article

Inflation is a major macroeconomic problem for which the purchasing power of money income decreases due to a persistent increase in the general price level of goods and services. A lower amount of inflation is actually good for economy. It acts like an incentive for producer to increase the production level which reduces the unemployment rate and accelerates the economic growth. But when it gets hyper (to be very fast), economy gets destroyed.
Bangladesh has been undergoing from 5% to 7% inflation rate since 1995. Its inflationary rate measured by consumer’s price index has crept and reached the highest level of 6.12% on September 2017. Too much money chasing too few goods or demand is growing faster than supply and increased cost of production may be primary reason for inflation. The upward pressure of price level relates to economic as well as non-economic occurrence.
For any reason like increase in government expenditure (luxurious Budget in 2017-18 fiscal year), an increase of pay scales government employees and any occasion such as Ramadan and New Year increase the aggregate demand and induce the consumer to consume more consequently price hikes in the economy. The postulate of government luxurious budget in every year influences the price with paying the further cost of inflation. Perhaps suppliers want to increase its production level but its technology is not upgraded in our country. Paying higher wage of workers and increasing of pay scales of government employees increase the income of the consumers which has led to increase the consumption. Supply doesn’t increase from production at the same extent. Such inflation is occurring as supply remains stuck of lower rate of production. Notwithstanding, the collusion of supplier makes resistance over the required goods supply during higher demand occasion and creates artificial malaises in goods market. This might be playing a role pushing the price up.
Recently aggregate demand exceeds aggregate supply due to the bad harvest season wrapped throughout the year. Strong economic zone of hoar area has been affected by unbearable flash flood. Approximately 1, 00,000 hectares of Boro has gone under water in flash flood in mid of last year. Moreover north-western water-lands destroyed more than 2, 00,000 hectares of mature Boro paddy. The country may lose around 800,000 tonnes of Boro this year. As a result this shortage has definitely created problems in current rice price hikes. Such uncontrollable accommodating shock or external shock has reduced the aggregate supply and took place stagflation (occurrence of both stagnation and inflation). People of the country are experiencing the soaring up of price level in their necessary goods everyday thus it reduces the individual standard of living. Onion’s price due to less import and bad harvest in Indian onion production has increased 71 percent at last December and is persisting higher price in recent time. In addition, all other nominal factors of income will lead to increase in cost of all factors due to change in one price level. This unpredictable price hampers living standard of the general people and enlarges the pangs in their life.
Inflation may be caused because of bearing anticipated and unanticipated cost. People either can be prepared accordingly or not. Inflation distorts savings and investment decision. Inflation reduces the real return on saving. As incentive to saving falls, investment will increase due to lower cost of borrowing. Such distortion creates a wide mismatch in capital market and capital market has to be expectedly endured it. From those with fixed income to those who can set their own fees- the first category faces more damage as they cannot protect their real income. Fixed income might be adversely affected and cannot manage their everyday demand as purchasing power has reduced. Cost of living increases unanticipated way consequently low income families who have already been experiencing squeezing of their purchasing capacity for high price of rice, vegetable and onion cannot afford their living cost. Inflation creates an effect on balance of payment by paying a recession in fixed exchange rate and creates vicious cycle of further inflation in flexible exchange rate because of trade deficit with rest of the world. So it is needed to keep stuck a moderate inflation rate of policy makers and government.
To maintain the higher level of production, there must be some technological advancement. We welcome to government to decrease the import tariff on the rice to meet the shortage of rice supply but government should take immediate steps to mitigate unavoidable inundate persuasiveness and get incentive the farmer to produce more agricultural food by subsidised. Privatisation should be needed in import substitutive goods that make competiveness over the market and increase the aggregate supply. Premeditation about the necessary good import like onion would be taken in peak harvest period and try to move from import trough cultivation domestically to afford the goods during any sudden shock. Stakeholders of such policy such as government, supplier and labour or employers negotiate and decide the best one to control inflation in order to reduce the income factors of production. Lastly price surveillance authority should strictly be applied so that the syndicates cannot create artificial shortage of goods.
In conclusion, to solve the overall problem, it is must to reduce inflationary expectation. To control inflation through government policies, credibility of politicians is important. They should not be influenced for political gain and most crucially central bank should be independent in their activities.

The writer is an undergraduate student of the University of Dhaka.

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