An Assignment on

The causes of inflation & its socio-economic impact on

Bangladesh
Course Name: DTBE
Course Code: 4205

Submitted to: Submitted by:

Moshahida Sultana Md. Ataullah Bukhari
Associate Professor, ID: 26097
Department A&IS Section : A
Faculty of Business Studies
University of Dhaka

Submission Date: 30 May, 2024

 Bangladesh, a lower-middle-income country, faces the challenge of inflation, which erodes
purchasing power and disrupts economic stability. Understanding the causes and socio-economic
impacts of inflation is crucial for policymakers to design effective solutions.

Causes of Inflation in Bangladesh:

 Demand-Pull Inflation: This occurs when the demand for goods and services exceeds the
available supply. This can be triggered by factors like:
o Increased government spending: If the government injects a large amount of money into the
economy through spending or stimulus packages, it can increase demand without a
corresponding rise in production, leading to inflation.
o Rising consumer confidence: When consumers feel optimistic about the economy and have
more money to spend, overall demand increases, potentially pushing prices up.
 Cost-Push Inflation: This occurs when the cost of production increases, leading businesses to
raise prices to maintain profit margins. Factors contributing to cost-push inflation in Bangladesh
include:
o Global commodity price hikes: Bangladesh relies on imports for essential goods like fuel and
food grains. If global prices of these commodities rise, it increases production costs for
businesses domestically.
o Supply chain disruptions: Disruptions caused by natural disasters, political unrest, or trade
wars can lead to shortages of essential goods, pushing prices higher.
o Wage increases: While desirable for workers, significant wage hikes can increase production
costs for businesses, potentially prompting them to raise prices.
 Exchange rate depreciation: If the Bangladeshi Taka weakens against other currencies, it
becomes more expensive to import goods, leading to cost-push inflation. This can be caused by
factors like global economic fluctuations or capital flight.
 Monetary policy: The Bangladesh Bank, the country's central bank, plays a role in managing
inflation through interest rates. If interest rates are kept too low, it can encourage borrowing and
spending, leading to inflation.
 Socio-Economic Impact of Inflation in Bangladesh:
Inflation in Bangladesh disproportionately affects different segments of society, with low-
income households bearing the brunt of the burden. Here's a breakdown of the key impacts:
 Reduced purchasing power: As prices rise, the value of money decreases, making it harder for
people, especially those on fixed incomes, to afford basic necessities like food, clothing, and
housing. This can lead to increased poverty and malnutrition.
 Impact on savings: Inflation discourages saving as the value of saved money diminishes over
time. This can hinder long-term investment and economic growth.
 Erosion of business profits: Businesses face rising production costs due to inflation, which can
eat into their profits and limit their ability to invest and expand.
 Uncertainty and economic instability: High and volatile inflation creates uncertainty for
businesses and consumers, discouraging investment and economic activity.
 Social unrest: Persistent inflation can lead to social unrest as frustration grows over rising living
costs.


Specific Challenges for Bangladesh:

 High dependence on imports: Bangladesh relies heavily on imports for essential goods, making
it vulnerable to global price fluctuations that can fuel inflation.
 Inefficient supply chains: Weak infrastructure and logistical bottlenecks can exacerbate supply
chain disruptions and price hikes.
 Limited social safety nets: The lack of robust social safety nets leaves low-income households
particularly exposed to the negative impacts of inflation.
Policy Responses to Inflation:
The Bangladesh government and the Bangladesh Bank can implement various measures to
address inflation:
 Monetary policy: The Bangladesh Bank can use interest rate adjustments to manage inflation.
Raising interest rates discourages borrowing and spending, helping to curb inflation. However,
this needs to be balanced with promoting economic growth.
 Fiscal policy: The government can implement targeted fiscal measures, such as subsidies for
essential goods, to mitigate the impact on low-income households. However, careful planning is
needed to avoid excessive government spending that can itself contribute to inflation.
 Supply-side measures: Investing in domestic production, improving agricultural productivity,
and diversifying import sources can help reduce reliance on imported goods and lessen
vulnerability to global price hikes.
 Infrastructure development: Improving infrastructure can streamline supply chains and reduce
logistics costs, potentially mitigating cost-push inflation.

Conclusion:
Inflation poses a significant challenge to Bangladesh's economic development and social
stability. By understanding the causes and impacts of inflation, policymakers can design
effective strategies that address the root causes, promote economic growth, and protect the most
vulnerable segments of society. This will require a multi-pronged approach that combines
monetary and fiscal policy measures with investments in infrastructure and domestic production.