The Bangladesh Bureau of Statistics (BBS) reported November 2024 inflation to be 11.39%. Food inflation clocked in at 13.8%, one of the highest we have seen in the last decade. Non-food inflation was slightly lower at 9.39%.
The high inflation number confirmed general people’s suspicions regarding inflation. For a different set of people, it was vindication that the current monetary policy stance of high interest rates is not correct.
I would however argue that both groups are missing a few vital points. I will try to elaborate on the missing parts below.
Yearly or monthly?
BBS calculates a monthly consumer price index. Inflation is calculated to be the year over year change of the index. By that logic, the November inflation was the % change between the consumer price index of November 2024 and November 2023. Almost all journalists focus on this number while calculating inflation.
However, we need to look at an additional measure. That is the month over month inflation number. The month over month number captures the most recent trend in inflation. In November 2024, food prices declined by 2.13% compared to October 2024.
Based on data from online grocery retailers and TCB, I found that prices of a large number of food items have declined further in December. We are very likely to see month over month food inflation decline in both December 2024 and January 2025.
Price hikes or increase in affordability?
This brings me to my second point. Inflation is the % change in prices. A lower inflation doesn’t mean prices have come down but rather the % increase in price hikes has come down.
Yet this is highly misunderstood by the vast majority of people in the world who seem to believe that lower inflation means lower prices.
Despite the declining food prices in November, people find it difficult to relate it to lower inflation. That is because they are thinking in terms of their affordability which hasn’t improved significantly.
For policy-makers however, the month over month number provides significant insights on whether their current policy stance is working or not.
The missing link between interest rates and exchange rates
The critics of the current interest rate regime believe that inflation in Bangladesh is mostly a supply side phenomenon. Curtailing demand using higher interest rates does not help reduce inflation.
While this is not an unreasonable argument, it misses an important point.
Exchange rate stability and the availability of US Dollars is probably the single most important supply side factor for Bangladesh.
Any currency depreciation results in an immediate price hike of goods and services.
In addition, shortages of US Dollars translate into shortage of essential commodities and imported energy that results in further price hikes.
And the way to bring exchange rate stability is keeping interest rates sufficiently high. There is no other way to do this.
Final thoughts
Economies are complex creatures that don’t respond rapidly to policy changes. Even the most perfect economic policy will take time to start delivering results.
In between, external shocks like floods can derail and delay the expected trajectory of improvement. So can political uncertainty and unrest.
Hence, we need to be patient in assessing whether the policies are working or not.
At the same time, we need to set realistic goals. It would be unrealistic to expect affordability to increase overnight as that would imply prices have to decline (ie deflation) without any corresponding decrease in income levels.
The most realistic path forward would be a gradual reduction in price hikes, allowing the central bank to reduce interest rates to stimulate the economy. Affordability will increase when income growth surpasses inflation rate.
Asif Khan, CFA is the Chairman of EDGE AMC Limited. He is also the current president of CFA Society Bangladesh.