BANGLADESH RESEARCH PUBLICATIONS JOURNAL

ISSN: 1998-2003, Volume: 8, Issue: 1, Page: 07-17, January - February, 2013

INFLATION BEHAVIOR: EVIDENCE FROM BANGLADESH

Mohammad Zoynul Abedin1*, Fahmida E Moula2 and Shahnaz Parvin1*

Mohammad Zoynul Abedin1*, Fahmida E Moula2 and Shahnaz Parvin (2013). Inflation Behavior: Evidence from
Bangladesh.
Bangladesh
Res.
Pub.
J.
8(1):
07-17.
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from
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Abstract
The rise in the inflation rate has prompted two views of the sources of
higher inflation in Bangladesh. One is the cost-push inflation which is
typically caused by supply shocks such as flood, draught and oil price hike.
The other is the demand-pull inflation that occurs when the aggregate
demand (AD) in an economy outpaces the aggregate supply (AS). This
article has two objectives: first, it identifies the leading source of the current
inflationary pressure in Bangladesh using economic data. Second, it argues
that more aggressive concretionary monetary policy is needed to pull
down the inflation rate. The results indicate to maintain price stability; the
government must work on both economic and non-economic factors that
have instigated the ongoing inflation. It would be important to address the
sources underlying slow domestic demand and take steps to counter their
adverse impacts. At the same time, the Bangladesh Bank needs to identify
the factors contributing to monetary expansion, assess the extent of the
problem, and design appropriate policy mix consistent with current
situations.

Key words: Evidence and Inflation Behavior.

Introduction
Inflation has become a well-entrenched phenomenon in many countries.
Somehow it seems that the general price level can only rise implying that there is
an inflationary bias in society. Consensus has it that inflation is likely to impose
considerable economic costs (Fischer and Modigliani, 1978). Types of costs are,
for instance, menu costs, the decrease in real money balances and decreased
efficiency of the price system. There is, however, a lack of understanding of the
process which systematically generates inflation (Davis, 1991). One of the central
objectives of traditional monetary policy is inflation control since the belief is that,
among others; low inflation helps to improve resource allocation and fosters rapid
and stable economic growth. The view also holds that inflation is primarily a
monetary phenomenon so that low inflation is to be achieved mainly through
aggregate demand control by pursuing concretionary monetary (and fiscal)
policies. It is argued that these policies should also be supported by liberalization,
privatization, and other macroeconomic reforms to create a more open and
competitive economy driven by the private sector. In short, the argument is that
there exists a tradeoff between inflation and growth (alternatively between
inflation and unemployment) that makes inflation targeting as the dominant
*Corresponding Authors email: zoynulmiu@gmail.com

1 Assistant Professor, Department of Finance and Banking, Hajee Mohammad Danesh Science and
Technology University Dinajpur 5200, Bangladesh
2 Student, Master of Social Science, Department of Sociology, University of Chittagong,
Chittagong-4331. 5200, Bangladesh

Abedin et al.

paradigm in monetary policy. Macroeconomists and central bankers pay close

attention to inflation behavior, both in their theoretical debates and in empirical
studies. The importance of inflation behavior results from the fact that they
influence the behavior of economic agents, i.e., in terms of consumption, savings
and investment decisions. Moreover, to the extent that they provide an unbiased
predictor of future inflation, quantitative measures of expected inflation may
constitute an important information variable taken into account in forwardlooking considerations and monetary policy decisions (Forsells and Kenny, 2002a).
Finally, the inflation behavior of different groups of economic agents indicate the
degree of confidence enjoyed by the central bank, the credibility of inflation
targets, and whether these targets seem to be attainable. Depending on their
nature, inflation behavior may play an important role in price formation. By
affecting real interest rates, changes in inflation behavior may lead to changes in
aggregate demand, which may then influence prices. As regards cost-push
effects, an increase in the expected rate of inflation may make employees
demand higher wage settlements. Companies, anticipating higher cost to be
faced in the future, may see incentives to increase prices and may be more
willing to pay higher wages. Even if prices are not adjusted immediately,
companies may temporarily put off the sale of their products. All these
interactions, combined with each other, may result in an increase in demand and
a simultaneous decrease in supply. In this way, a rise in inflation may generate an
increase in prices. The growing popularity of the strategy of direct inflation
targeting stems from the conviction that central banks ought to influence inflation
behavior. Monetary policy transparency and central bank credibility key
elements in direct inflation targeting allow monetary policy to meet its ultimate
objective of price stability, and by increasing the forward-lookingness of inflation
behavior may reduce the sacrifice ratio (Gomez, 2002). This paper attempts to
examine the current state of inflation in Bangladesh with the help of literature
pertaining to inflation, to confront their basic properties with features of consumer
expectations and provide the concluding remarks at last. The main objective of
the study is to examine the current state of inflation in Bangladesh. In precise
terms, following are the specific objectives of the study: i) to identify the leading
sources of current inflationary pressure in Bangladesh; ii) to evaluate the scenario
of inflation through literature review; and iii) to suggests some policies for
controlling ongoing inflation.

Methodology
The core of the subject matter is designed based on the concepts and
their theoretical applications. A significant feature of the study is the use of
secondary data and information. Almost 14 years (1995-2009) of macroeconomic
data are used throughout the paper. The important secondary sources are the
corporations annual reports, books, journals, magazines, and the daily news
paper also. The collected data and information have been analyzed and
examined critically through statistical tools and techniques, graphs and figures in
order to make the study more understandable, informative and useful towards
the researchers, academicians, governments agencies, regulatory bodies, policy
makers, students and mass people as a whole.

Results and Discussion

Inflation, which some economists have dubbed as the cruelest tax of all,
is eroding purchasing power of consumers, especially the fixed and low income
groups of people in net commodity importing countries, around the world.
Following the persistent high-inflation regimes in the late 1970s and early 1980s
(largely due to two oil shocks), inflation rates have varied an average of two to
three percent in the industrialized countries and fell to single-digit levels in many
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Inflation Behavior: Evidence from Bangladesh

developing countries since the 1990s.1 It is widely viewed that globalization has
had a positive impact on prices for over one and a half decade by heightening
competition both on the demand and supply side. However, the specter of
inflation has once again become a major concern for central bankers and policy
makers around the world, as many countries have been experiencing high
inflation largely owing to a notable increase in commodity prices. The prices of
cereals, petroleum products, edible oil, and metals are skyrocketing in the
international markets in recent years. Consequently, the commodity price indices
have shown an upward trend lately (Figure 1) (Islam 2008).

Figure 1. Indices of Primary Commodity Prices, 2000-2012 (2005=100)

Source: International Monetary Fund

A widely discussed plausible cause of high inflation in Bangladesh is the

impact of global price hike. As a food and petroleum importing country,
Bangladesh has to bear the brunt of global price hike of these items. Since the
beginning of the current decade and up to 2008 global prices of fuel and food
followed an increasing trend which got transmitted into the countrys domestic
economy. There has been some respite from high inflationary pressure towards
the end of 2008 and 2009 due to the global meltdown and the resultant price fall
of major commodities in the global market. With the turn round of the global
economy from the recession towards the end of 2009 and beginning of 2010,
inflation started to shoot up. This trend was also observed in Bangladesh.
Table 1: Food and Non-Food Inflation, (2000-01=100).
Year
FY2000-01
FY2001-02
FY2002-03
FY2003-04
FY2004-05
FY2005-06
FY2006-07
FY2007-08
FY2008-09
FY2009-10
FY2010-11
FY2011-12

General inflation
1.94
2.79
4.38
5.83
6.49
7.16
7.2
9.94
6.66
7.31
8.79
11.41

Food Inflation
1.38
1.63
3.46
6.93
7.9
7.76
8.11
12.28
7.19
8.53
11.33
13.28

Non Food Inflation

3.04
4.61
5.66
4.37
4.33
6.4
5.9
6.32
5.91
5.45
4.15
8

Source: Based on Bangladesh Bank Data

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Abedin et al.

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Figure 2: Food and Non-Food Inflation

Source: Based on Bangladesh Bank Data
The major source of high inflation in Bangladesh is high food inflation. The
reason behind this assumption is that food carries a large weight in the CPI of
Bangladesh. The weight of food items in the CPI commodity basket of
Bangladesh is as high as 58.8 per cent, of which the share of rice is 20.1 per cent.
Hence the rise in food inflation affects the overall inflation significantly. Based on
BBS data, it has been estimated that the contribution of rice inflation to the overall
inflation was 23.41 per cent in FY 2011-12.
Table 2: Contribution of Food and Non-food items to General CPI Inflation, (200001=100)
Year
Food Contribution in Inflation
Non Food Contribution in Inflation
FY2000-01
41.86
58.14
FY2000-02
34.38
65.62
FY2000-03
46.48
53.52
FY2000-04
69.94
30.06
FY2000-05
71.62
28.38
FY2000-06
63.77
36.23
FY2000-07
66.28
33.72
FY2000-08
72.69
27.31
FY2000-09
63.52
36.48
FY2000-10
68.66
31.34
FY2000-11
75.85
24.15
FY2000-12
68.52
31.48
Source: Bangladesh Bank Data

Inflation appears to have emerged as a permanent phenomenon in the

economic landscape of Bangladesh over the recent past. It has started to
increase since the second quarter of FY2009-10 and continued to rise throughout
FY2009-10 and FY2010-11. During the first three months of FY2011-12 there has not
been any change in the direction of inflationary movements. The 12-month point
to point consumer price index (CPI) inflation has reached as high as 11.97 per
cent in September 2011 compared to 7.61 per cent in September 2010. This is the
highest inflation in last one decade. As in most years, food inflation was higher
than general inflation. Food inflation reached to 13.75 per cent in September 2011
as opposed to 9.72 per cent in September 2010. High food inflation had a knock
on effect on non-food inflation as well, pushing it upward to settle at 8.77 per cent
in September 2011 from as low as 3.69 per cent in September 2010.
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Inflation Behavior: Evidence from Bangladesh

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Table 3: Annual Average CPI Inflation; (2000 = 100).

CPI Classification
National
General Index
Inflation
Food Index
Inflation
Non-food Index
Inflation
Rural
General Index
Inflation
Food Index
Inflation
Non-food Index
Inflation
Urban
General Index
Inflation
Food Index
Inflation
Non-food Index
Inflation

2009-10

2010-11

2011-12

221.53
7.31
240.55
8.553
196.84
5.45

241.02
8.8
267.83
11.34
20.01
4.15

266.61
10.62
295.86
10.47
227.87
11.15

223.39
7.16
235.76
7.96
202.36
5.62

244.38
9.4
264.13
12.03
210.81
4.18

269.31
10.2
289.82
9.73
234.47
11.22

216.98
7.69
252.21
9.85
183.4
4.99

232.81
7.3
276.82
9.76
190.87
4.07

260.01
11.68
310.58
12.2
211.82
10.98

Source: Bangladesh Bureau of Statistics

In Bangladesh the average inflation (general) in FY 2000 was 1.94% while it

is found 9.76% in FY 2011. But during these years changes in inflation did not follow
any monotonic pattern. Bangladesh faces a tougher challenge in bringing down
burgeoning inflation. The latest Bangladesh Bureau of Statistics (BBS) data shows
that inflation had increased to 11.97 % (on point-to-point or monthly count) in
September, the highest in 10 years. Food inflation, which was 12.7 per cent in
August, had increased to 13.90 % in September while food inflation in urban areas
had increased to 14.69 % in the same month from 12.94 % in August.
The data on inflation reveal that inflation in Bangladesh is influenced by food and
fuel prices. Higher food and fuel prices obviously affect inflation rate. The recent
declining trend in food and non-food inflation may be explained by the decline in
global commodity prices like petroleum, rice, pulses, onion, edible oil and other
food items and higher domestic production of food due to favorable weather
condition and some effective measures taken by the Government which
included conducting open market operation, exemption of duties on essential
commodities, sufficient import of food grains, strengthening of internal
procurement and its supply, expansion of subsidies on fuel and fertilizer and
widening of social safety net programmes etc.

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Abedin et al.

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Figure 3: Annual percentage in inflation

Source: International Monetary Fund World Economic Outlook

Another feature of recent inflation in Bangladesh is that rural food inflation

has been closer to urban food inflation which was not the case in Bangladesh till
August 2010. The likely causes for high rural inflation could be increasing demand
due to higher purchasing power of the rural population through rising agricultural
production, higher labor wages, expanded social safety net programme and
inflow of remittances. If compared with other South Asian countries Bangladesh
stands second, next to Pakistan, in terms of the record of inflation rate in the
region. Despite higher food price in the international market, India has been able
to keep its food price index down through higher production of major crops and
by ensuring adequate supply in the domestic market. Pakistan epitomizes the
case of a conflict economy with a high inflation rate and a very low growth rate.

Fig 4: Rural (CPI) Inflation, (On Monthly Basis), (2000-01=100)

Source: Bangladesh Bureau of Statistics

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Inflation Behavior: Evidence from Bangladesh

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Fig 5: Urban (CPI) Inflation, (On Monthly Basis), (2000-01=100)

Source: Bangladesh Bureau of Statistics

Higher food prices exert an upward pressure on inflation particularly in

South Asian countries where such prices account for a major proportion of the
inflation basket. High inflation is a major challenge in South Asia, where inflation
has been in double digits in recent years and was 10.9 per cent in 2010. Some
deceleration in inflation to 8.4 per cent is estimated in 2011. As inflation affects the
poor disproportionately, it is a major cause of concern. High budget deficits in
general are causing inflation.
Table 4: Inflation (CPI) trend in SAARC Countries
Name of the Countries
Afganistan
Bangladesh
Bhutan
India
Maldives
Nepal
Pakistan
Srilanka

2008
26.8
9.9
8.8
9.1
12.3
7.7
12
22.6

2009
-8.3
6.7
4.4
12.4
7
12.6
20.8
3.4

2010
8.2
8.1
7
12
6.6
10
11.7
5.9

2011
13.8
10.7
8.8
8.9
12.8
9.6
11.9
6.7

2012
12.31
7.93
9.4
7.55
15.05
11.02
8.79
9.5

Sources: IMF, International Financial Statistics databases; ADB, Asian Development Outlook 2011.

Figure 6: South Asian Inflationary Situation

At country level, high inflation rates are being experienced by most
countries in South Asia. Pakistan has been experiencing double-digit inflation for
some years now. High inflation is becoming a major concern in India with adverse
impact on its strong economic growth momentum and the people. In Nepal,
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Abedin et al.

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inflation, which stood at 9.6 per cent in 2010, has also remained close to doubledigit in 2011. Inflationary pressures also re-emerged in the Bangladesh economy
as the consumer price index increased by 8.8 per cent in 2011 from 7.3 per cent in
2010. Sri Lanka after some respite from high inflation in 2010 is again experiencing
rising inflation.
The current practice of calculating national CPI is, first, to compute
separate CPIs for rural and urban areas using monthly commodity-wise price data
based on field-level surveys on a monthly basis and average commodity weights
derived from the consumption baskets. In the second stage, the national CPI is
calculated as the weighted (using the share of population as weights) average of
the CPIs for rural and urban areas; giving 70.9 percent weight to the rural CPI and
29.1 percent to the urban CPI. At present, 215 commodities and services are
included in the rural CPI while the number of items is 302 in the urban CPI.
Table 5: Descriptive statistics of month-to-month price changes (annualized rate)
National
Mean
Std. dev
Skewness
Kurtosis
Rural
Mean
Std. dev
Skewness
Kurtosis
Urban
Mean
Std. dev
Skewness
Kurtosis
No. of observations

2005-06

2006-07

2007-08

2008-09

2009-10

2010-11

2011-12

7.2
0.995
0.718
0.238

8.72
3.21
0.45
0.29

9.71
1.53
-0.72
-0.64

8.65
1.2
-0.21
-1.44

6.63
1.3
0.19
0.02

8.78
1.42
0.066
-1.88

10.63
1.04
-0.74
-0.23

7.34
0.91
0.65
1.11

9.03
3.55
0.57
0.31

9.87
3.56
-0.65
-0.61

8.74
4.23
-0.35
0.69

6.36
5.2
-0.69
-0.87

8.46
3.65
0.34
-0.46

10.89
2.56
0.22
0.35

6.85
1.21
0.8
0.45
12

7.95
4.35
0.42
2.47
12

9.32
8.82
-0.71
-0.03
12

8.41
3.69
-0.87
-0.73
12

7.27
6.45
0.45
-0.72
12

9.55
4.52
0.91
-0.85
12

9.98
5.54
0.65
-0.11
12

Source: Authors calculation

Some descriptive statistics of month-to-month changes in CPI inflation in

Bangladesh are provided in Table 5. In terms of the distribution of price changes in
a particular year, the mean value of the inflation rate is lowest in 2005-2006 at the
rural, urban and national levels. Excluding 2009-2010, the mean value is highest in
2011-2012 at the national, rural and urban levels. The mean value show a rising
tendency of inflation rates during 2005-2012. The standard deviation has an
increasing trend since 2005-06 reflecting excessive volatility in the monthly price
indices in recent years. In terms of skewness, the coefficient varies considerably
from negative to positive on year to year basis. The kurtosis of the distribution of
the price changes is always lower than 3 during the sample period.
A few factors are believed to have contributed to the ongoing inflationary
pressures in Bangladesh. The price hike of fuel and non-fuel commodities in the
international markets is widely blamed for the current inflation. The depreciation in
the countrys currency unit, the BDT against its major trading partners, the
expansion of M3 and credit have also played a part in raising prices. Bangladesh
faced two major natural disasters (summer floods and cyclone Sidr) in 2007 which
damaged standing crops, among others, and escalated food prices. The current
caretaker governments drives against corruption have exacerbated the
problem. Last but not least, Bangladesh is not self-sufficient in terms of food
production and the country has had a long history of food problems, if not crises.
Moreover, in recent years, growth in the agriculture sector has been sluggish
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Inflation Behavior: Evidence from Bangladesh

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(Islam 2008).

Conclusion
Current indications show that commodity prices in the international market
are likely to rise during the coming months of FY12. With greater global economic
integration, inflation in Bangladesh is more open now than before to external
pressures coming from outside the country. The reasons lie in many factors
including high import dependence, increased global pressure of excess demand,
weak productivity growth in the domestic economy, and persistence of
significant structural and institutional rigidities. The last inflation episode that
Bangladesh faced was not policy induced, but was fueled more by domestic
supply shocks and global price hikes. But the current buildup of inflationary
pressure can partly be attributed to the liquidity expansion that took place in the
first half of FY12. With rapid buildup of net foreign assets (NFA) and in the absence
of sterilization, liquidity expansion has created some pressure particularly in asset
markets (stock and real estate markets) and in non-food prices. These issues need
more explicit consideration in Bangladesh Banks monetary policy response along
with clear signals for the future.

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