Inflation in Bangladesh and Its Reason and Solution

Topics: Inflation, Monetary policy, Central bank Pages: 13 (4548 words) Published: March 2, 2013
Executive Summery
There are number of factors behind the rising trend of inflation in Bangladesh. The factors contributed the most in the rise hike of essential items, particularly food, are slow growth in agriculture, rise in the world prices of food items, sharp depreciation of taka against US dollar and especially against the Indian rupee, and rise in the prices of diesel and kerosene. These causes affect our general people directly. As per capita GDP is not responding with inflation, purchasing power of people has shrunk drastically. Food inflation is causing more problems for rural people than urban people. And loss of Taka’s value is making people go down class hierarchy. We recommend that Bangladesh Bank should take necessary steps to reduce inflation rate. We have to be concerned about devaluation of our currency. Inflation is a complex, dynamic process which cannot be comprehended simply through occasional debates or newspaper articles. Rigorous research is needed to understand inflation dynamics and its implications for monetary policy. Much of the responsibilities lay within the purview of local universities, policy institutes, and in particular the Bangladesh Bank.

Table of Contents

Inflation is an increase in the amount of currency in circulation, resulting in a relatively sharp and sudden fall in its value and rise in prices: it may be caused by an increase in the volume of paper money issued or of gold mined, or a relative increase in expenditures as when the supply of goods fails to meet the demand. This definition includes some of the basic economics of inflation and would seem to indicate that inflation is not defined as the increase in prices but as the increase in the supply of money that causes the increase in prices i.e. inflation is a cause rather than an effect. Inflation's effects on an economy are various and can be simultaneously positive and negative. Negative effects of inflation include a decrease in the real value of money and other monetary items over time, uncertainty over future inflation may discourage investment and savings, and high inflation may lead to shortages of goods if consumers begin hoarding out of concern that prices will increase in the future. Positive effects include ensuring central banks can adjust nominal interest rates (intended to mitigate recessions), and encouraging investment in non-monetary capital projects. Today, most mainstream economists favor a low, steady rate of inflation. 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.

Components of inflation:
Inflation=Expected inflation-β(U-U*) +V
β = Sensitivity
U*= Natural rate of unemployment
U= Unemployment
V= Supply shocks
Policy maker do not have any influence over Supply shock & expected rate of inflation. So, they try to manage inflation by controlling unemployment rate. Measure of Inflation:
Inflation is usually estimated by calculating the inflation rate of a price index, usually the Consumer Price Index. The Consumer Price Index measures prices of a selection of goods and services purchased by a "typical consumer". The inflation rate is the percentage rate of change of a price index over time. For instance, in January 2010, the Bangladesh Consumer Price Index was 324.21, and in January 2011 it was 350.54. The formula for calculating the annual percentage rate inflation in the CPI over the course of 2010 is: (350.54-324.21)/324.21=0.103 or 10.3%

The resulting inflation rate for the CPI in this one year period is 10.3%, meaning the general level of prices for typical Bangladeshi consumers rose by 10.3% in 2010.

Types of Inflation
There are two major types of inflation:
1. Cost-push...
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