—Dr Narayan Das—

Since the onset of the Covid pandemic, inflation has remained one of the biggest challenges in Bangladesh’s economy. According to the Bangladesh Bureau of Statistics (BBS), general inflation in December 2024 stood at 10.9 percent, a 0.5 percentage point decrease from 11.4 percent in the previous month. Food inflation in December 2024 was 12.9 percent, declining slightly by 0.9 percentage points from the previous month’s rate. Tackling inflation, specifically food inflation, remains a major challenge for the interim government. Since inflation is a monetary phenomenon, i.e. determined by the supply, value, and circulation of money, the central bank is trying to take appropriate policy measures to control inflation. To this end, the Bangladesh Bank increased the repo rate (the interest rate at which the central bank lends to commercial banks) in October 2024 by 50 basis points to 10 percent, the fifth hike last year and 11th since May 2022.

Essentially, inflation occurs when aggregate demand exceeds aggregate supply, driving up prices. Excess demand is created mainly in two ways: firstly, when the demand increases with economic growth, known as demand-pull inflation. It is considered less severe than cost-pull inflation, which happens when the aggregate supply decreases due to a higher cost of production.

In the past five years, the world has faced two different economic shocks, both affecting aggregate supply adversely, i.e. cost-pull inflation: the Covid pandemic and the Russia-Ukraine war. The latter raised the cost of production in Bangladesh by increasing the price of fuel, decreasing aggregate supply, and hence creating cost-push inflation. The pandemic also disrupted supply chains. This disruption, combined with the appreciation of the US dollar, worsened inflation by increasing the cost of imported raw materials. The official exchange rate of the US dollar was approximately Tk 85 in 2021, but as of January 26, 2025, it has surged to Tk 122, marking a 41 percent increase. Moreover, the agricultural wage rate has been rising steadily, which contributes to food inflation. BBS data shows that between July 2023 and June 2024, the agricultural wage rate increased by 8.2 percent.

On the other hand, the country’s economic growth has created excess demand at a steady rate. As a result, the demand for fish, meat, dairy products, and other commodities is increasing over time. According to the Household Income and Expenditure Survey (HIES), the national daily per capita consumption of meat, poultry, and eggs increased from 39 grams in 2016 to 52.8 grams in 2022, about 35 percent increase in six years. The increased consumption was reflected in both rural (34.8 grams to 46.1 grams) and urban (49.6 grams to 67.5 grams) areas. Economic growth has also been accompanied by population growth, which has also increased the demand for food. So, the inflation of necessary food items may occur due to both the demand-pull and cost-push phenomena.

Controlling cost-push inflation is inconceivably difficult. Some measures to prevent this type of inflation include freezing wages and putting a ceiling on the prices of basic commodities. However, these strategies are close to impossible to implement and not feasible for controlling inflation in the long run.

The central bank is currently trying to battle inflation by reducing demand, i.e. raising interest rates. But this strategy may not help in controlling essential commodity prices. Even when the contractionary monetary policy (higher rate reduces money supply) works, it does so through a decrease in demand by tightening credit through increased interest rates, which affects the nutrition of the population negatively—potentially a damaging strategy in a country with a high prevalence of undernutrition. According to the World Health Organization (WHO), the stunting rate among under-five children in Bangladesh was 26.4 percent in 2022, significantly higher than the global average of 22.3 percent. Consequently, such a strategy may, in fact, increase inflation in the future by hurting human capital development and thus reducing long-run supply. Besides, higher interest rates may hurt investment and, consequently, supply, which can further worsen cost-push inflation in the long run.

Therefore, the demand-reducing measures are not long-term desirable policies. The government should focus on increasing supply in the long run to deal with inflationary pressure on essential commodities by increasing imports and domestic production. Proper incentives should be provided in these arenas to increase the supply of essential food commodities. Raw material prices in poultry, livestock, and fishing should be controlled to ensure higher production, if necessary, through subsidy. Landless farmers can be provided with low interest loans to increase investment. The price of fuel could be subsidised as fuel is a substantial component of production costs. As short-run measures, safety net coverage should be increased so that all vulnerable households can afford basic necessities in the face of high inflation. These policies have, of course, implications for the national budget, but ensuring food security should be the top-most priority of the government. The tax-GDP ratio must be improved to finance these policies; currently, Bangladesh’s tax-GDP ratio is one of the lowest not just in South Asia, but also in the world.

It is often argued that the market syndicates of essential commodities drive the prices up. If this is the case, then one would expect a large gap between production or import costs and retail prices. The government should scrutinise the market to verify the existence of syndicates and take measures accordingly.

The interim government has already taken some useful steps, such as withdrawing tariffs partially or fully on some essential commodities. In October 2024, the Trading Corporation of Bangladesh (TCB) launched a programme to sell oil, lentils, and rice from trucks in Dhaka and Chattogram, which was suspended recently. This programme should be resumed until inflation is under control to provide support to the underprivileged population. This will not only enable the vulnerable groups to buy food items at affordable prices, but also decrease market prices. The amount of public procurement of rice should be increased. The interim government should also procure other essential commodities like potatoes and onions, ensuring fair prices for farmers and eventually increasing the production of these products.

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Dr Narayan Das is professor at BRAC Institute of Governance and Development (BIGD).