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.
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.
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.
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.
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.