In recent times, Bangladesh and other countries of the world are noticing a worrying change. A close look at the news or the dailies shows that the price of everyday items is on the rise. Why is that happening? The increasing price of commodities, in other words, the reduced purchasing power is attributed to inflation. In this article, we take a deep dive into inflation, its causes, and its impact on business, people and professionals across Bangladesh and the globe.

What is Inflation?

According to Investopedia, Inflation is the phenomenon of reduced purchasing capability. It is also defined as a situation where a currency loses its value, that is, the purchasing power over time. Now it is hard to see exactly how the money loses its value. For example, the prices of daily essentials like vegetables, oil, wheat, onion, garlic have seen an unprecedented surge in price.

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What does that mean? It means people are getting less commodities for the same amount of money spent. The increment might not seem like much. In percentage, the inflation rise is even less. But when the commodities add up along with the households that spend on these commodities, the difference rises to a huge sum.

Now there might be a question, why does inflation occur? In simple terms, inflation occurs when there is an increased money supply in the economy. There are again two types of inflation which will be discussed in the latter point.

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Why does Inflation Occur?

To better understand why inflation occurs, it's important to understand the types of inflation. There are mainly two types of inflation – demand-pull inflation and cost-push inflation.

Demand-pull inflation occurs when there is excess demand for any product. It can be a commodity or service or anything in general. The cost-push inflation occurs when the price of a product increases due to the increase in the cost of factors of production.

From the perspective of Bangladesh, both demand-pull and cost-push inflation are attributed to the overall state of inflation in the country.

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The inflation of Bangladesh is at an all-time high of 5.98%. Since mid-2021, Bangladesh has been steadily seeing an increment of the inflation rate which peaked in December. There are two direct plausible reasons as to why inflation is occurring. And both of these apply to almost all similar developing economies like Bangladesh.

The first reason is bailouts, stimulus packages, and subsidies. Most of the business and industry sector has suffered greatly from the pandemic. The government undertook various stimulus packages which helped the businesses stay afloat. This increased the money supply in the economy.

While the money supply meant businesses could go on to sustain themselves it also posed a few issues. Due to lockdowns and restrictions in movement, people didn’t spend much of their disposable income. As the economy gradually reopens, people are spending this money which is creating a supply shortage.

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Another reason for the supply shortage is the fallout of the global supply chain. With increased production, sourcing, and transportation cost, businesses have no other way but to increase the price of the commodities. Again, this is directly related to inflation as people prefer to stock up before the purchasing power plummets even further. That in turn causes a supply shortage of products.

Diverse Impacts of Inflation

While inflation has its fair share of positives, it means nothing if the complementary policy cannot safeguard personal and business entities in the process. Inflation might create more job opportunities, increase production, and have better ROI. But from the perspective of Bangladesh, that might look like a long shot.

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How does Inflation Affect Businesses

Though in general terms, inflation has a positive impact on businesses. Businesses can increase the price and create a better profit margin for themselves. However, inflation comes in the wake of a long-stagnant period in the economy of Bangladesh.

Businesses have suffered much as it is. The subsidy and stimulus package has somehow helped them to stay afloat in this period.

The profit-induced price hike will be like a double-edged sword for businesses. The inflation itself reduces the purchasing power of the general people as it is. If the business wants to ensure profit, the price margin goes even higher. The dual increment drastically drops the sales which in turn puts the businesses back to square one.

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Impact of Inflation on Professionals

The professionals are in the middle ground between the high-income business entities and the low-income marginal community. However, the impact of inflation on professionals is determined by the wage theory. If wage inflation (the increment of wage along with inflation) is positive in relation to the actual inflation, the effect of reduced purchasing power is not felt. It also increases employment in the economy.

But that is not the case in Bangladesh. Even though the country is suffering from inflation, there is no increment in wages across any board. Some lower-income groups do not even get paid which is simply alarming.

Without any change in the wage rate, any increment in inflation will have a negative impact on the general public. The consumption rate will decrease as people will spend less and less over time. This will negatively hurt the business as well.

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How Does Inflaton Affect Marginal Community

Lower income people is the hardest hit by the effect of inflation. People belonging to this category make very little as it is. There is virtually no wage inflation as there is no wage increment for these people. On top of that, many garments and factory workers complain of not having paid in months. The situation stands grim for the lower-income people as they work to make ends meet as it is. A reduced purchasing power only pushes them towards dire poverty.

Final Thoughts

The impact and consequence of inflation are tough, to say the least. While there are different ways to combat inflation, there aren’t any immediate steps taken by the government. The government can introduce wage and price control measures to reduce the impact. It can also introduce contractionary monetary policy but in the current situation of the economy, that step feels highly unlikely.

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