Originally posted at Dhaka Tribune. Write up reflects authors own independent thoughts and in no way represents the firm he works for. So get ready for higher inflation in Bangladesh.
In mid January 2014, I felt that inflation would continue to remain weak in the absence of consumer confidence and low credit growth. In the light of new information and some simple grade six mathematics, I am now changing my view on inflation. To cut a long story short, I now believe that by June 2014, inflation will go very close to double digits. Without much ado, let me give my explanations.
Benefit of base year effect would reverse
From July 2013 to January 2014 MoM inflation averaged 1.1%. Despite that, YoY inflation was relatively low due to what economists commonly term “base year effect.” Because of that, going forward a small 0.6% MoM (7.2% annualized) inflation for the next 5 months would be enough to take inflation to double digits at the end of June 2014.
Min wage hike of 77% for RMG workers
The minimum wage hike by 77% for RMG workers was responsible for January 2014 MoM inflation of 1.2%. I believe that the full effect of the minimum wage hike will be visible in the February 2014 numbers. Also around 30-40% of the factories are yet to implement the wage hike, which can have another round of effects.
Energy price hike on the cards
Another variable I have not taken into consideration yet is the potential energy price hike. Media reports clearly suggest that the government is considering hiking both the energy price and the gas price which had been pending for some time. However, the timing and magnitude of both are both quite unknown at this point.
Unlikely for food prices to go lower
Since 2013, Bangladesh has had the benefit of very low food prices that helped inflation remain at reasonable levels. Unfortunately that is very bad for farmers who typically cannot cover their production costs. Thus, according to the “cobweb” theory, they will go for underproduction in the next harvest cycle. For example I heard that in certain parts of Bangladesh, 5kg of tomatoes were sold for Tk7 (9 cents). That kind of price should not be sustainable.
The chart shows where YoY inflation will end up assuming different MoM inflation rates of 0.4%, 0.6%, and 0.8%. At best, I would say it will be 0.6% MoM for the next 5 months, even though that is much lower than the last 6 months average of 1.1%.
Bangladesh Bank has also been clearly showing us, in the last two monetary policy statements, that they are afraid of inflation pressure building up. That prompted them not to reduce policy rates even though GDP growth is expected to come down this fiscal year.