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April 20, 2013

Term-paper On Analysis of inflation in Bangladesh (2007-2013)

Abstract

This paper argues that inflation-targeting central banks should announce explicit loss function with numerical relative weights on output-gap stabilization and use and announce optimal time-varying instrument-rate paths and corresponding inflation and output-gap forecasts. Simple voting procedures for forming the Monetary Policy Committee’s aggregate loss function and time-varying instrument-rate paths are suggested. Announcing an explicit loss function improves the transparency of inflation targeting and eliminates some misunderstandings of
the meaning of “flexible” inflation targeting. Using time-varying instrument-rate paths avoids a number of inconsistencies and other problems inherently associated with constant-interest-rate forecasts. In this analyses mainly we describe general national inflation rate, food inflation rate, non food inflation rate some reason, problems and solution of inflation rate.



Introduction
Inflation is defined as a sustained increase in the general level of prices for goods and services. It is measured as an annual percentage increase. As inflation rises, every dollar you own buys a smaller percentage of a good or service. 
The value of a dollar does not stay constant when there is inflation. The value of a dollar is observed in terms of purchasing power, which are the real, tangible goods that money can buy. When inflation goes up, there is a decline in the purchasing power of money. For example, if the inflation rate is 2% annually, then theoretically a $1 pack of gum will cost $1.02 in a year. After inflation, your dollar can't buy the same goods it could beforehand.
Inflation can mean either an increase in the money supply or an increase in price levels. Generally, when we hear about inflation, we are hearing about a rise in prices compared to some benchmark. If the money supply has been increased, this will usually manifest itself in higher price levels - it is simply a matter of time. For the sake of this discussion, we will consider inflation as measured by the core Consumer Price Index (CPI), which is the standard measurement of inflation used in the U.S. financial markets. Core CPI excludes food and energy from its formulas because these goods show more price volatility than the remainder of the CPI.

Scope of the study
There were huge scopes to work in the area of this Case Study. Considering the dead line, and exposure of the paper has been wide-ranging. The study “A case Study of Analysis of inflation in Bangladesh” has covered overall scenario of macroeconomics situation of Bangladesh. It has measured the living standard of mass people. We have a chance to work on the economic variable used in modern economic world. By doing the assignment, we are able to know that the importance of inflation to assess how the people of the country living in. In the case study we have showed how the above variables are inter related on each other.


Methodology
We have used the concept of the course, information of the case study.
Sources of Data
Here the secondary sources of information were used. The secondary sources are:
   Ø  Books.

    Ø  Website.

Limitation of the study
While conducting the report on “A case Study of Analysis of inflation in Bangladesh”, some limitations were yet present there:

     Ø  Because of time shortage many related area can’t be focused in depth.
     Ø  Website in different organization of Bangladesh contains poor information.
Ø  Recent data and information on different activities was unavailable.
      Ø  Political violence


Definition
“Too much money in circulation causes the money to lose value”-this is the true meaning of inflation. The popular opinion about the costs of inflation is that inflation makes everyone worse off by reducing the purchasing power of incomes, eroding living standards and adding, in many ways, to life’s uncertainties.
In economics, inflation is a rise in the general level of prices of goods and services in an economy over a period of time. Inflation refers to a rise in prices that causes the purchasing power of a nation to fall. Inflation is a normal economic development as long as the annual percentage remains low; once the percentage rises over a per-determined level, it is considered an inflation crisis. In another word “Inflation means that your money won’t buy as much today as you could yesterday”.
Definition of Inflation rate (consumer prices)
This entry furnishes the annual percent change in consumer prices compared with the previous year's consumer prices. The inflation rate is the percentage rate of change of a price index over time

General Inflation Rate from 2007-2013
Bangladesh Bureau of Statistics (BBS) computes National Consumer Price Index (CPI) of national general inflation by the consumers in their day-to-day life. The current CPI has been constructed using 1995-96 as the base year. In order to construct the price index, the commodity and weight of the index basket from the Household Income and Expenditure Survey (HIES), 1995-96 are used. All rural and urban price indices were compiled using the lists of consumer goods of rural and urban households based on the survey. And finally, the national price index has been computed by taking into account the weighted average of consumption expenditures of the two areas. All indices are shown separately in food and non-food groups which are again divided into a number of sub groups. Consumer Price Index and inflation during FY 2006-07 to FY 2012-13 are shown in Table No 2.1
Table No: 2.1
Year
Inflation rate (Consumer Price)
2006-07
7.2
2007-08
9.9
2008-09
6.6
2009-10
7.3
2010-11
8.8
2011-12
8.6
2012-13
7.14
Graph of Inflation
Graph No: 2.1
The rate of inflation (national) in FY 2007-2013 different types of value. During 2006-07 inflation rate is 7.2, 2007-08 inflation rate is 9.9 going up next year inflation rate is 6.6going down then the next year going up. During 2007-08 inflation rate is high and during the 2008-09 inflation rate is lower.
Food Inflation Rate from 2007-2013

Bangladesh Bureau of Statistics (BBS) computes National Consumer Price Index (CPI) using food   by the consumers in their day-to-day life. The current CPI has been constructed using 1995-96 as the base year. In order to construct the price index, the commodity and weight of the index basket from the Household Income and Expenditure Survey (HIES), 1995-96 are used. All rural and urban price indices were compiled using the lists of consumer goods of rural and urban households based on the survey. And finally, the national price index has been computed by taking into account the weighted average of consumption expenditures of the two areas. All indices are shown separately in food and non-food groups which are again divided into a number of sub groups. Consumer Price Index and inflation during FY 2006-07 to FY 2012-13 are shown in Table No 2.
Table No: 2.2

Year
Inflation rate (Consumer Price)
2006-07
8.1
2007-08
12.2
2008-09
7.1
2009-10
8.5
2010-11
11.3
2011-12
7.7
2012-13
6.6



Graph of food Inflation
Graph No: 2.2
The rate of inflation (national) in FY 2007-2013 stood different types of value. Hear we can see easily how inflation rate of food is going up and down.  In 2006-07 inflation rate is 8.1 and 2007-08 inflation rate 12.2 its going up and next year inflation rate is 7.1 is going down. During 2007-08 food inflation was higher and 2012-13 is the lower.

Non Food Inflation Rate from 2007-2013
Bangladesh Bureau of Statistics (BBS) computes National Consumer Price Index (CPI) using non-food   by the consumers in their day-to-day life. The current CPI has been constructed using 1995-96 as the base year. In order to construct the price index, the commodity and weight of the index basket from the Household Income and Expenditure Survey (HIES), 1995-96 are used. All rural and urban price indices were compiled using the lists of consumer goods of rural and urban households based on the survey. And finally, the national price index has been computed by taking into account the weighted average of consumption expenditures of the two areas. All indices are shown separately in food and non-food groups which are again divided into a number of sub groups. Consumer Price Index and inflation during FY 2006-07 to FY 2012-13 are shown in Table No 2.3
Table No: 2.3
Year
Inflation rate (Consumer Price)
2006-07
5.9
2007-08
6.3
2008-09
5.9
2009-10
7.6
2010-11
6.2
2011-12
10.2
2012-13
10


Graph of non-food Inflation
Graph No: 2.3
The rate of inflation (national) in FY 2007-2013 stood different types of value. Hear we can see easily how inflation rate of food is going up and down.  In 2006-07 inflation rate is 5.9 and 2007-08 inflation rate 6.3 its going up and next year inflation rate is 5.9 is going down. During 2011-12 food inflation was higher and 2008-09 is the lower.




Causes of inflation rate
    Ø  When government print excess money
    Ø  When raw materials price or transport cost increased the finished products price also increased.
   Ø  When labor cost or worker salary increased, the product cost also increased. So, companies increased the product price
   Ø  When there is a group of rich people who got black money or extra money, they can increase the price of products by creating extra demand.
Problems of inflation rate
High or unpredictable inflation rates are regarded as harmful to an overall economy. They add inefficiencies in the market, and make it difficult for companies to budget or plan long term. Inflation can act as a drag on productivity as companies are forced to shift resources away from products and services in order to focus on profit and losses from currency inflation. Uncertainty about the future purchasing power of money discourages investment and saving and inflation can impose hidden tax increases. In case of international trade, ‘Higher inflation in one economy than another will cause the first economy's exports to become more expensive and affect the balance of trade’
  Ø  Businesses lose because the cost of borrowed money - which they use to fund their growth - increases.
  Ø  The obvious losers are people with mortgages who have endured 12 consecutive rate rises - plus some unpleasant little extra rises thrown in by the banks this year. But renters also lose, as landlords squeezed by higher rates push up their rents to recover some costs.
    Ø  Everyone loses when interest rates raise - even those who think they are winners.
    Ø  Rising inflation is the major reason cited for the ongoing interest rate rises.
   Ø  And even those who have paid off their mortgage and have cash sitting in the bank lose to some degree, thanks to the nasty effects of higher inflation.

Solution of inflation rate
   Ø  Reduce interest and increase supply side factors. Massive import to offset demand.
   Ø  Increased interest rates increase the cost of borrowing, discouraging consumers from borrowing and spending.
   Ø  Increased interest rates make it more attractive to save money
    Ø  Increased interest rates reduce the disposable income of those with mortgages.
   Ø  Higher interest rates increased the value of the exchange rate leading to lower exports and more imports.
   Ø  To reduce inflationary pressures the government can increase tax and reduce government spending.
   Ø  Higher interest rates (tightening monetary policy)
   Ø  Pull demand down
   Ø  Reduce the cost of production

Conclusion
After completing this study we have learnt about inflation rate of Bangladesh. In our country inflation rates highly relying on supply side and exchange rate. Inflation is positively related with growth rate up to 7 percent after that it gets negative. Above of the conclusion we discourse about some problem, causes and solution. If we follow those solutions we can reduce our inflation rate. 


References
1.      http://cpd.org.bd/



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