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We will look at :
•Definition of inflation
•Types of inflation
•Causes of inflation
•Cost of inflation
•Rate of inflation in Bangladesh
What is inflation:
Inflation is the persistent and
generalized rise in price level
for a particular time. During
inflation purchasing power of
money falls and real income
drops down.
INFLATION AND
BANGLADESH
The latest
inflation rate
Bangladesh has
been 9.4% (2008
est.)according to
CIA world fact
book. .
Creeping
Inflation
Suppressed
Inflation
Galloping
Inflation
Types of
Inflation
Stagflation
Hyper
Inflation
Degrees of Inflation
Rate of
inflation
Outcome
Creeping
inflation
<4%
Very mild inflation which might bring
competitiveness
Mild
inflation
4%-10%
Mild inflation which must be kept under
control to avoid future difficulties.
Inflationa
ry
pressure
10%-20%
Inflationary pressures builds up with high
wage demands and interest rates. Savings
begins to be affected. Strict policies are
essential.
Severe
inflation
20%-50%
Serious inflation. Confidence in money
eroded.
Hyper
inflation
50%+
Signs of hyper inflation. Domestic economy
collapses, currency becomes worthless
internally or in international FC market.
Creeping
Inflation
• It is a slow rate of inflation where price increases at a rate of 0-4%. Here
price increases slowly so it don’t hurt the customers but increases the profit
of the manufacturer. Therefore, investment, employment, output, and
economic growth increases.
• This is a faster rate of inflation. Here, price increases at a rate of 5-100%.
Here, price increases sharply and people loss their purchasing power.
Therefore, demand fall, lead to fall in investment , employment , output and
Galloping
Inflation
economic growth.
Hyper
Inflation
• This is a very high rate of inflation. Here, price increases at a rate of more
than 100%. Here, price increases sharply and people loss their purchasing
power. Therefore, demand fall. further investment , employment , output
and economic growth falls.
• It occurs when market inflation shows less then the actual due to
government measures. If government takes off the measures, inflation will
Suppressed
further increase.
Inflation
• a relatively recent phenomenon in the economy of the 1970s is what is
called ‘Stagflation or Slumpflation’ . It is the worse condition for an economy
Stagflation
when both inflation and unemployment increases at the same time.
Retail Price Index
 Retail price index is measure of
changes in the prices of consumer
goods and services bought by
people.
 An index number deals with
percentage changes.
 An index of prices is an average
of the percentage changes in the
prices of a number of goods and
services
Example
Year 1
Commodity
Weight
Price
Index
Weighted index
A
1
Tk 10
100
100
B
2
Tk 100
100
200
C
3
Tk 500
100
300
=6
=600/6
RPI=100
Year2
Commodity
Weight
Price
Index
Weighted index
A
1
Tk12
120
120
B
2
Tk 150
150
300
C
3
Tk 450
90
270
=6
Change in index =y2-y1/y1 X
690/6
RPI=115
100+100 Rate of inflation 15 %
Retail Price Index
•If the index is calculated to be over 100 in year 2,
then the cost of living has increased compared with
the base date, year 1.
•for example, if the index is 115, then the cost of
living has increased by 5 percent since the base
year.
•An index of below 100 in year 2 would indicate a fall
in the cost of living.
•The change in the cost of living index is usually
measured in nominal terms, which are in terms of the
prices operating in the year in which the goods are
produced.
CAUSES OF
INFLATION
COST
PUSH
INFLATION
DEMAND
PULL
INFLATION
INCREASE
IN MONEY
SUPPLY
AS2
AS1
Price level
An increase in wages, increase in
import prices or an increase in
indirect taxation may raise the
cost of factors of production. It
causes a leftward shift to the
aggregate supply curve and price
level is ‘pushed up’.
P1
AD
O
Q1
National output
AS2
Price level
AS1
An increase in wages, increase in
import prices or an increase in
indirect taxation may raise the
cost of factors of production. It
causes a leftward shift to the
aggregate supply curve and price
level is ‘pushed up’.
P2
P1
AD
O
Q2
Q1
National output
MONEY SUPPLY
When the
government
increases the supply
of money inside a
country the value of
that country's
currency also
decreases locally
and internationally.
p1
p2
Q1
Q2
Causes of Inflation in Bangladesh
Excess population demands more
goods and services every year. Thus
demand pull inflation takes place.
Dependency on imported products and
syndicate of importers also causes
prices to rise and Cost push inflation
occurs.
Good amount of foreign aid and
overseas loans from international
financial institutions increases the
supply of money and causes high
inflation.
•
•
•
Shoes and lather cost: During
inflation the fixed income groups
are put in trouble. They have to
move from one place to another or
one market to another for a better
bargain price. It costs their time
and energy.
Social cost: during inflation fixed
income group cannot consume
sufficient goods and services.
Therefore, they become highly
annoyed with government and it
creates social and political costs.
Menu cost: During inflation the
fixed priced shops and companies
have to change their price list,
price tags and catalogue frequently
which costs a lot to them and
increases their costs of goods sold.
On export: due to inflation a
country lose its international
competitiveness and its export fall.
It also makes the foreign goods
cheaper and import increases.
Causing adverse effect on their
balance sheet(BOP).
On exchange rate: when inflation
occurs, price of commodities
increases and export decreases, for
which automatically demand of
local currency falls and exchange
rate fall.
On standard of living: during
inflation purchasing power of
people fall lead to fall in level of
consumption and standard of
living.
CONSEQUENCES OF INFLATION
• Unequal distribution of wealth and income. Poor
•
•
•
•
•
peoples’ living standard are worse off year after
year.
Real economic growth slows down.
Uncertainty in internal and external investment.
Labour unrest in industries especially garments
and other labour oriented manufacturing
industries.
Too much intervention of government in open
market ; slowing down the competitive forces.
Consumers switches over to imported goods
which are cheaper and causes Balance of
payment deficit. As a result Inflation becomes
accelerating!!!
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