Home ›› 02 Oct 2022 ›› Editorial
The integrated global financial architecture manifests that the transmission mechanism instantly translates the inflationary spiral all over the world through global supply chain disruption. The concomitant intervention of the central banks all over the world moves the syndrome in tandem. Even countries with historical experiences of sound monetary policies are at stake to halt the increasing price spiral. The inflation band is unprecedented.
The United States experienced such an inflationary spiral alone over five decades ago. President Richard Nixon, on August 15, 1971, announced, “I am today ordering a freeze on all prices and wages throughout the United States.” The increases would have to be approved by a “ Pay Board” and a “ Price Commission” after a 90 -day freeze; lifting controls after the 1972 election. Many Americans considered the derailment from the market economy norm as a political gamble in the landslide victory in 1972 over democratic Senator George McGovern. Indeed it was the choking time for the free enterprise system which was heuristically expressed by President George W. Bush in 2008, sometimes you have to abandon the free market principles to save the free-market system. Inflation was indeed a curse factor in the defeat of the Second Term of President Jimmy Carter who termed inflation as the worst enemy of all of us.
The inflationary syndrome in those days lacked diversity, was country-specific, and could be moderated through sound domestic policies. However, with the current nature of mongrel syndrome partly endogenous and partly exogenous, we observe various surviving strategies in this current episode of the price spiral. The inflation data in many countries are vulnerable to scrutiny in the barometer of the cost of living. The overall Consumer Price Index [CPI] when viewed in the core and headline category depicts substantial differences in the case of developing economies than the developed economies. The inclusion of food and fuel price with appropriate weights may represent the true index in the headline inflation as these items are not included in the core inflation. Food and fuel cost over 35 percent of the consumption basket of developing countries in comparison to 15 percent of the developed economies. Core inflation is less volatile than headline inflation.
The Bangladesh Bureau of Statistics [BBS] recorded general inflation [headline inflation] on a point-to-point basis at 7.48 percent in July 2022 as the prices of almost all items, including food and fuel remained high since February. The BBS includes 422 food and non-food items and quoted 8.19 percent general food inflation and 6.39 percent non-food inflation in July, the first month of the current financial year of 2022-23. Historical data shows that the monthly inflation was 7.58 percent in July 2013, the highest in nine years. However, the accuracy of the BBS data was suspected by the major think tanks and economists on the ground that the consumers could not afford to maintain their livelihood with their current income; the price hike of essentials was much higher than the calculation of the government agency. With no perceptible increase in the wage rate in many instances, mostly fixed-income groups and informal sector workers face a miserable life; the decline in real income is reflected through one percentage point less increase in wage than the increase in inflation. The general wage rate in July 2022 recorded an increase of 6.56 percent lower than the rate of inflation.
BBS has not yet published the inflation data for August 2022 though it is the end of September. The raw data indicates that inflation has exceeded the 9 percent markup and could cross the single-digit band. A delay in the timely publication of vital economic data constitutes a concern on the genuineness and the motives of the government. A drop in the overall price level is reported early in the next month but an increase in the overall price level takes more time than the scheduled time. Indeed, inflation would reign at least for a few months because of the critical geopolitical situation, the self-styled referendum in Ukraine by Russia and the Nord stream leakage, and the cutting of gas to Europe in particular to France and Germany.
Inflation targeting as an instrument of containing inflation is effective when inflation is appropriately measured. Central banks adjust interest rates in line with the correct inflation rate so that the expected future level of inflation remains within the target range. The central banks must keep the interest rate above the inflation rate. When the inflation rate accelerates and is expected to continue, the central bank’s policy response is a higher interest rate level commensurate with the change in the inflation trajectory. A policy based on wrong parameters and thus with wrong assumptions may lead to wrong projections. Setting interest rates at a level when the real interest rate is negative and sticking to that level could destabilize sound macroeconomic management.
Thus an unexpected acceleration in prices baffles the households. Households who assumed inflation in the single digit find their savings dwindle which is often reflected in the accumulated interest rate charge in the credit card transactions. Common people with fixed incomes lose faith in the official publication of inflation data. The deficit in trust is now a serious concern in many economies. Inflation rates are debunked or deflated by the government agencies responsible for their publication in reporting a lower price increase than is actually the case. Many thank tanks and economists consider that inflation data is underreported in Bangladesh. The recent disproportionate fuel price hikes created a vicious circle of price hikes in many essential commodities and services prices. The price increase is more perceptible than a price decrease as we observe in the reduction of fuel price accompanied by a marginal change in the cost of living of the fixed income group.
Inflation erodes the real income of the people. Inflation helps the government in servicing the domestic debt or debt denominated in domestic currency. Given the curse of inflation, it is in the interest of the fixed income earners' that the government should consider policies that prevent price increases or keep such increases to a minimum level.
The writer, is a former Member, Directing Staff, Development and Economics Division, Bangladesh Public Administration Training Center at Savar, Dhaka. He may be contacted at [email protected]
