The perils of rising cost of living

The rising cost of living all over the world has left the global economy in a state of peril. The price spiral now constitutes a challenge for the monetary and fiscal authorities in the developed and developing world. Trade surfaced as anti-inflationary measures on many occasions, but it is now a big contributor to the worldwide inflationary syndrome. Indeed, mutually beneficial trade creates a soothing effect in the international commodity market and in containing the price of many essential commodities. Rough weather conditions or floods could severely curtail the food production of a country yet the country may avert famine by importing that could be financed through exportables based on the law of comparative advantage. A poor harvest in Russia may force the country to barter cheap oil and gas for food from the United States. It is mutually beneficial for Russia to import part of the grain for domestic consumption in exchange for cheap gas and oil. Unfortunately, the beneficial impact of the trade on price accommodation is fading on the continuation of the Russian-Ukraine war and as a consequence, the global economy is witnessing dreadful distress in the rising cost of living.

The rising cost of living is destabilizing the fine social fabric both in the developing and developed world. Liz Truss in her six weeks premiership begs nations for mistakes over a tax cut plan that experts warned would worsen inflation, if not wreak economic havoc. Europeans are anticipating skyrocketing energy costs this winter and the European Union is actively considering a cap on the energy price. The aggressive steps of increasing the interest rate by the Federal Reserve in choking demand and taming price levels could lead to recession. Economists generally assume two per cent inflation is optimum in invoking growth with price stability. However; the developed world is now experiencing at least four times above that pace with dismal growth prospects.

The headline inflation in Bangladesh in September 2022 according to BBS exceeded 9.50 per cent and is now at the threshold of breaking the double-digit ceiling. The commodity composition and the weights of the different components are crucial in the matrix of the cost of living. The differential weights of the various commodities in a typical consumption basket in a developed and developing world or the least developed countries in proportion to total expenditure could make a lot of difference in these measurements. In the developed world over 40 per cent of the total expenditure is spent on housing, 17 per cent on transportation, and 16 per cent on food.

You get quite the opposite distributional weights in the case of the developing world; out of 75 per cent of the total income spent on three main items, food and transport constitute over 50 per cent of the total expenditure for a majority of people in the developing or the least developed countries. This is true for Thailand as well as for Bangladesh. During the period from January 2020 to October 20, 2022, the average per centage increase in the price of rice, wheat, edible oil, pulses, sugar, and chicken span between 43 per cent to 88 per cent. The average price increase of rice [coarse and fine] average in the range of 50 per cent. Wheat an alternative and a substitute for coarse rice observed a phenomenal increase of 96 per cent. Edible oil is the second on the list with an average of 88 per cent. The increase in prices of pulses, sugar, eggs, and chicken respectively at 73, 45, 43, and 60 per cent manifests a drastic reduction in the standard of living of the majority of the people mainly the fixed-income group and the working class. Over 65 per cent of the common people struggle to buy food and many essential items from the TCB subsidized outlets. The vegetables on average cost over Tk. 60 per kg and the monthly expenditure on essential items cost over Tk. 2,000. It is inexpedient for fixed-income earning people to finance this extra cost with almost a freeze on wages. Many families are now forced to live on savings or slash many essential commodities from the consumption list. The Bangladesh Bank proposed policy of lifting the consumer loan interest rate cap could be a lever in flaring the price of many items and could lead to a distressful economic situation for consumers who prefer to live on borrowing.

The mismatch between demand and supply could be a probable reason for the rising cost of living. The preoccupation of economic preservation during the COVID-19 with stimulus package was a sound policy but the supply lag or failure of the genuine use of the stimulus package in many instances put the economy in a stagflationary conundrum. The central bank's response in containing the demand through an increase in the interest rate adds fuel to the fire especially the transmission mechanism of the higher interest rate causing significant appreciation of the USD. The current worldwide inflation is one of the consequences of the appreciation of the USD. It was a mistake for the Fed to assume that inflation is a temporary phenomenon and rely on policy elevating demand generating sustained inflationary pressure in the economy.

The issue of the rising cost of living and scarcity of food and fuel is on the government agenda, “Protect Bangladesh from possible famine and food deficit-like situations. I believe it is definitely possible with efforts from all," On fuel and electricity scarcity, the best advice is on the austerity measures, “We are also maintaining austerity measures in some cases. We are compelled to do for the present situation. Fiscal prudence and pragmatic expenditures in the real sector of the economy could be viable options for the government.

Trade could be an effective devise in containing inflation in the global economy. The shipment of grain, other foodstuffs, and fertilizer, including ammonia, from Ukraine through the Joint Coordination Centre [JCC] comprising representatives from the Russian Federation, Türkiye, Ukraine, and the United Nations is the most recent example. The Black Sea Grain Initiative signed on July 22, 2022, could contain the increasing trend of the food price Index in a period of five months; the index has decreased nearly 14 per cent from its peak in March 2022. “Globally, a record 345 million people in more than 80 countries are currently facing acute food insecurity, while up to 50 million people in 45 countries are at risk of being pushed into famine without humanitarian support.”

The writer teaches at BRAC University and BIDS as an adjunct Faculty in the Master's Programme in Economics. He can be contacted at [email protected]