It's not unusual for products to have a hiked-up price before Eid. However, in an ordinary scenario, the price readjusts after Eid to some extent. This Eid has seen a very hot price hike for green chillies. The price per kg of green chilli rose to Tk1,000 within only three days. This is more than ten-fold of the usual.
Ceteris Paribus (holding other factors constant), indicates around 1000% inflation in the market. This is not just alarming or strange, but also something very interesting to analyze. This unusual price increase in a single product of the community market is not an unprecedented incident. Bangladesh has seen such an unusual price hike for onions and salt not too long ago. So, it is about time an in-depth study of why this happens and to what extent inflation is responsible, has been done.
Inflation is defined as the rise in prices over time that reduces the buying power of a currency. Undoubtedly, Bangladesh is now in a critical period for controlling or containing inflation. Last month, the country's inflation rate was 9.94% -- well above the desired amount. Even though worldwide inflation has been partly blamed for the high inflation rate in Bangladesh, the internal rationale behind the increasing rate cannot be ignored any longer.
Domestic price increases are usually caused by two forms of inflation: Structural inflation and bottleneck inflation. Structural inflation is common in underdeveloped countries -- owing to the weak structure of their economy. However, the most common sort of inflation is caused by a lack of supply while demand remains steady. "Bottleneck inflation" refers to this type of inflation.
Globally, the central bank is responsible for curbing inflation. Likewise, in Bangladesh, Bangladesh Bank (BB) is responsible for controlling inflation, and the institution is doing its duty.
Recently, BB has taken a contractionary monetary policy, restricting the excess money supply in the economy to control inflation and also acknowledged that the goal is a challenging one to achieve. It has raised policy rates and lending rates to discourage borrowing, launched agricultural initiatives to promote agricultural production, and is moving toward a single foreign currency rate. BB is leaving no stone unturned.
However, these programs indeed have little impact on what happens in the commodity market. But still, BB has just one tool to combat inflation, and it is making full use of it. So, what is the problem?
In reality, BB's policy is strong enough to limit solely structural inflation, which it is doing. This month, the inflation has decreased to 20 basis points and stood at 9.74%. In the commodity market, supply has not drastically decreased as well.
After visiting the local markets, the Directorate of National Consumers Right Protection said the supply of pepper was normal across the country. If there was no structural inflation and no significant reduction in supply, then why did the price of chilli go up 10 times higher? The answer is "psychological inflation."
The psychology or behaviour of the market participants does a lot to shape price in the market. When everyone in the economy speculates that the price of a certain commodity might go up, they start purchasing more than they require and start piling up. This suddenly places the demand curve higher and the price rises. But when they speculate that the price may fall soon, they stop purchasing which drags the demand curve lower and causes the price to fall.
This is the basis of behavioural finance. Similarly, the term "psychological inflation," is the fact that when a large portion of stakeholders decide to quote a higher price thinking the price justifies the inflation, they by force, inject inflationary pressure in the market.
In the past, what syndicates used to do was to pile the products in their storage, create an artificial shortage of supply and then charge a high price. But, now, just using the psychology and ill motivation of profit, the price is easily manipulated in the market.
The psychology of the business person of the country is responsible for this type of sudden price hike in any specific product. By making the 10% inflation liable, they, without any hesitation, quote a price 3-4 times the current price. They have developed a mindset that by investing Tk100 they can earn a profit of Tk900.
This business psychology is responsible for not just domestic inflation, but also for the failure of the country to not benefit when the global inflation goes down. The most relatable example of this is the price of fuel. When globally the price of oil, gas, or other fuels goes up, the price is adjusted in the country. But when the price comes down globally, businessmen in the country don't adjust the price again.
This isn't only about the businessmen, the syndicates, or the producers. Even service providers are succumbing to the psychology. When observing the behaviour of a typical rickshaw puller, one notices the psychology of blaming a 10% inflation for boosting the fee to 100%.
For example, if the rickshaw puller previously charged TK 20, he or she may now charge TK30 or, to a lesser extent, TK40 for the same distance. As a result, the inflation rate in his/her mind is 50% to 100%. When a businessman rides in that rickshaw, he receives a signal that the economy's income level has increased, allowing him to raise the price of her/his items even further.
Dramatic fluctuations in price are a serious issue. Its analysis should not be constrained within market monitoring only. Authorities need to dive deeper into the matter. Where any specific group or party is encouraging the practice or patronizing those who are involved in price setup needs to be checked. Whether any group is trying to agitate the people by making it difficult for them to purchase daily necessities must be inquired strictly.
Had there been a solid ground of reason for charging a high price -- for green chilli -- the price wouldn't have sharply fallen with the announcement of importing the products at a large scale from India. It is true that on one side, there are some green vegetables that grow and thrive in the rain, but there are also vegetables whose production and supply are disrupted in the season. However, the supply of green chilli, even after being decreased to a smaller extent, doesn't account for the limitless hike in price.
Unlike other times, steps have been taken very promptly by the authorities. On June 25, the government had already given authorization to private firms for the import of green chilli. On July 5, the Directorate of National Consumers Right Protection conducted drives in 41 districts and fined 118 businesses around Tk6.21 lakh for not displaying a price chart and overcharging customers. On the previous day, the directorate fined 148 traders around Tk3.39 lakh.
Even after such measures, no concrete or permanent solution has come to fruition. National Consumers' Right Protection needs to conduct strict drives regularly rather than waiting for the price hike of a specific commodity to become a burning issue. Then again, the Krishi Shomprosharon Odhidoptor can also aid to solve the problem by looking for ways to ensure undisrupted supply in the rainy season from high-located areas.
At the same time, the Commerce Ministry has its own role to play. As the country has announced its goal to be a smart one, prediction of calamities, probable loss, uncertainties in supply, and other facts like connectivity and an alternative way of planning must be made. Steps need to be taken in such a way that the buyers can have an idea regarding the price and availability not just in real-time, but ahead of time.
If the participants are well aware of how much loss they are to bear for any unprecedented event, there will be no shock in the market and the price will not fluctuate drastically. However, that portion of inflation that arises from psychology needs to be handled from a very critical point of view to find a suitable solution.
Dr Ashraful Alam Chowdhury is an Independent Researcher and Columnist. He completed his MSS in economics from Dhaka University. Then, he pursued post-graduation and PhD in economics from Emory University, Georgia, USA. He has experience working in the USA, Bangladesh, Myanmar, and India.
