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CURRENT INFLATION AND POLICY RESPONSES

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Inflation

Nobel prize-winning economist Milton Friedman once compared inflation to alcoholism. “When you start drinking or when you start printing too much money, the good effects come first, he said. The bad effects only come later …. When it comes to the cure, it’s the other way around.”

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Definition of Inflation

• Inflation is a rise in general level of prices of goods and services over time.

• Inflation can be thought of as a decrease in the value of the unit of currency.

• In classical political economy, inflation meant increasing the money supply.

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Current Inflation in Bangladesh

• Bangladesh has been experiencing high inflation rates in the last few years, rising from 1.9 percent in FY01 to 7.2 percent in FY07. The main feature of the current inflationary trend moreover is higher inflation in food items compared with that for non-food items.

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Current Inflation in Bangladesh

Table 1: Trends in Inflation (in %) Year General Food Non-food ------ --------- ------ -----------FY01 1.94 1.38 3.04FY02 2.79 1.63 4.61FY03 4.38 3.46 5.66FY04 5.83 6.92 4.37FY05 6.48 7.91 4.33FY06 7.16 7.76 6.40FY07 7.20 8.11 5.90

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Global inflation is picking up

Country Inflation (in %) Country Inflation (in %)

UK 3.3 (May) Iran 25.3 (May)

US 4.0 (Feb) Pakistan 19.3 (May)

Euro zone 3.2 (Feb) Hong Kong 19.2 (June)

Spain 4.5 China 7.7 (May)

Germany 7.1 Indonesia 10.38 (May)

Vietnam 25.0 (May) Sri Lanka 26.2 (May)

Singapore 7.5 (April) Malaysia 3.8 (May)

The Philippines 9.6 (May) India 11.42 (June)

Thailand 7.6 (May) Bangladesh 9.89 (April)

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The main factor is the recent increase in global commodity prices

• Prices remained high in the international commodity markets during March 2008. Strong upward movement in fuel, food, metals and fertilizers prices have pushed up global inflation in March 2008.

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Global Commodity Prices

Table 2: International Commodity Prices/Indices

Mar-07 Jun-07 Feb-08 Mar-08Energy

Crude Oil (US$ per barrel) 60.6 68.2 93.7 101.8IMF Energy Index (2005 = 100) 113.9 126.5 176.3 190.9WB Energy Index (1990 = 100) 264.9 298.0 408.2 445.1Coal 59.3 66.0 140.6 132.1

Food ($/MT)Rice 326.2 326.3 481.1 580.0Wheat 199.1 223.0 425.0 440.0Sugar 10.4 9.3 13.6 12.9Palm Oil 566.4 748.4 1109.5 1147.0Soybean Oil 679.5 782.9 1307.7 1321.0

Non-Food Non-EnergyCotton 128.7 133.6 160.5 180.1Diammonium Phosphate ($/MT) 420.5 434.5 828.1 1045.0Urea ($/MT) 318.0 289.0 325.3 377.8

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Factors Influencing Inflation

• Demand for energy has remained robust

• Costs of investment in oil has increased significantly

• Investment in oil has not risen in real terms

• Food supply constraints as production costs and transport cost are rising

• Rising demand for meat in China and India

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Factors Influencing Inflation

• Biofuel policies are also spilling over to the price of key food items (corn and soybean)

• The weakening of the dollar has influenced commodity prices

• Two successive droughts in Australia• Slowdown in the production growth of the staple

due to water shortages in Southeast Asia, Central America and West Africa

• Many food deficit countries have sought to import more.

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Factors Influencing Inflation

• India, China, Indonesia, Thailand, Egypt and Vietnam have curtailed exports of rice

• Ukraine, Russia and Kazakhstan have curbed wheat exports

• Argentina has levied high export taxes on soybean and beef exports

• There is land coming out of production in Asia (Vietnam, China, Indonesia and Thailand)

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Inflation in India

Inflation has touched more than 13-year high level

Table 3: Rate of Inflation in India (Figure in %)

01 Dec. 2007 3.75 16 Feb. 2008 4.89

08 Dec. 2007 3.65 23 Feb. 2008 5.02

15 Dec. 2007 3.45 01 March 2008 5.11

22 Dec. 2007 3.50 08 March 2008 5.92

29 Dec. 2007 3.50 15 March 2008 6.68

04 Jan. 2008 3.79 22 March 2008 7.00

11 Jan. 2008 3.83 29 March 2008 7.40

18 Jan. 2008 3.93 03 May 2008 7.83

26 Jan. 2008 4.11 31 May 2008 8.75

02 Feb. 2008 4.07 07 June 2008 11.05

09 Feb. 2008 4.35 27 June 2008 11.42

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Inflation in India

Steps to contain inflation:• Allowed import of rice at zero duty• Duties on crude and refined palmolein have been

brought down from 45% to 20% and 52.5% to 27.5%

• Duties on crude and refined sunflower have been reduced from 40% to 20% and 50% to 27.5%

• Scrapping of import duties on crude edible oils to nil and refined edible oils to 7.5%

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Inflation in India

• Duties on crude and refined mustard, rape seed have been brought down from 75% to 20% and 75% to 27.5%

• Banned exports of wheat, maize, edible oil, cement and pulses to boost supply

• Banned export of non-basmati rice and increased the minimum export price for basmati to $1200 tonne

• Withdrew incentives for steel exporters

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Inflation in India

• Decided to import 1.5 million tonnes of pulses in 2008-09 fiscal through public sector trading agencies

• lifted ban on non-basmati rice, edible oils and pulses to Bhutan

• On April 17, the Central Bank hiked the Cash Reserve Ratio by 50 basis points to 8.0 percent

• On 29 April, RBI raised the CRR by 25 basis points to 8.25 percent

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Inflation in India

• On 24 June, the Central bank raised its repo rate at which commercial banks borrow funds from the central bank to 8.5 percent from 8.0 percent

• It also announced a two-stage hike of the CRR by 25 basis points to 8.5 percent effective July 5, and by another 25 basis points to 8.75 percent on July 19.

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Inflation in India

• Despite a series of fiscal and monetary measures including cuts in customs duty, ban on export of rice, wheat, maize, edible oil, cement, pulses and tightening of cash flow, inflation has been showing no sign of coming down

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So what can be done to tackle these problems

• Reducing the level of protections and subsidies for biofuels production

• Policies to encourage energy efficiency• Urged major oil producers to

increase supply in response to rising demand

• We have to devise as many energy-saving methods within our socio-cultural milieu as we can.

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So what can be done to tackle these problems

• Agricultural policies to increase production and boost productivity – experts suggest extensive research on agriculture to ensure food security

• Requires a more determined effort to increase the viability of food cultivation, to improve the productivity of agriculture through public measures, and to expand and strengthen the public system of procurement and distribution

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So what can be done to tackle these problems

• Public intervention and regulation of markets is essential

• Current bans or limitations on exports have led only to hoarding and speculation, not lower domestic prices in those countries, with the ultimate result that food has not been reaching those most in need of it

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So what can be done to tackle these problems

• The roots of today’s food inflation are global, and cannot be tackled by the individual government in isolation.

• Inflation will come down only when world food production rises, and world prices fall.

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So what can be done to tackle these problems

• But the prospects for 2009 are not bad. After two draughts in a row, the chances are that Australia will have a good crop this year.

• Today’s high prices ought to induce farmers across the globe to grow more. The resultant bumper harvest could cool prices by 2009.

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So what can be done to tackle these problems

7 Tips for consumers to tackle inflation

• Buy in bulk and store products whose prices are likely to go up

• Consumers should take advantage of attractive offers at discount chains

• Start cutting down on discretionary consumption

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So what can be done to tackle these problems

• Do comparison shopping• Downgrade if your favourite brand is a

premium one and the category doesn’t have much differentiation

• Control your consumption of high-priced items

• Use substitutes and postpone consumption of certain items

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So what can be done to tackle these problems

Concluding Remarks……

• Diet in the time of inflation