Inflation and cost of living: Two views

| Updated: October 24, 2017 09:24:22

Inflation and cost of living: Two views

Every literate person knows that the relation between inflation and cost of living is positive, when the former rises the latter follows in on the heel. This is particularly so when the increase is in the consumer price index that reflects the price movement of food and essential items. Rise of prices in non-food items also affect cost of living, though after a brief time-lag. So from the point of view of consumers the dis-aggregation of inflation into food and non-food items has little practical significance. When the evanescent time-lag between food and non-food price hikes becomes real inflation does not work in water-tight compartments giving relief to consumers. Cost of living and inflation move hand in hand, whichever way they go.
The Bangladesh Bureau of Statistics (BBS) brought good tidings for consumers when it published the news that inflation had come down to 5.03 per cent in December last year, the lowest in 53 months. There could not be a better new year's greetings for the harried middle class and lower middle class consumers than this. The decline was the result of steady decrease in prices of non-food items since June 2016, it was reported. Lack of supply disruption stemming from a stable political environment was given the credit for this. Fall in non-food inflation was accompanied by declining food inflation, but it was marginal compared to non-food inflation, it was reported. According to BBS, non-food inflation dropped to 4.49 per cent in December 2016, a decline of 88 basis points from 5.33 per cent a month earlier. Compared to this food inflation fell slightly, to 5.41 per cent from 5.58 per cent in November, a much smaller decrease than non-food inflation over the same period. The BBS report pointed out that the steady decline in non-food inflation since June 2016 through December 2016 had to do with the weakening of aggregate demand caused by a large decline in remittances. If this is the main cause for the decline in non-food inflation, the shrinking of purchasing power due to the fall in remittance may also have contributed to fall in food prices, particularly in rural areas where low-income families depend on receipt of remittance money for expenditure on food items. So the explanation behind the decline in the overall inflation that went down to 33 basis points according to BBS lies in the weakening of demand-pull factors i.e. decline in purchasing power.
Weak demand-pull factor in the micro-economic context can be outweighed by relatively stronger cost-push factor (production cost) of both non-food and food items. Cost of living may rise if increase in prices of food items due to cost-push factors outpace the weak demand-pull factor for food items. This will give rise to a situation where prices of non-food items decline significantly and the theoretical marginal decline in food price following decline in remittance is overpowered by cost-push factors at work for the latter. The price rise in food items may not be entirely due to rise in cost of production and may result from the manipulation of the market by middle-men (syndicates in worst cases). In calculating the food inflation, this upward pressure of 'costs' is not usually taken into account by BBS. This year has not been an exception to this practice, it can be said.
CAB'S ANNUAL REPORT: A day before the BBS came out with its news about the decline in inflation, the Consumers Association of Bangladesh (CAB), a non-government body, revealed in their report that during the past year (2016) the cost of living rose by 6.47 per cent. The rise has been attributed to hikes in rents, transport and other non-food items and a large number of essential food items including rice, pulses, sugar, vegetables, edible oil, etc. The CAB found that the prices of food and services rose by 5.81 per cent in the just-concluded year. The CAB's annual report on cost of living due to rise in prices of both food and non-food items took into account the prices of 114 food items, 22 essential consumer goods and 14 utility services. The scope of the CAB study is greater, particularly in terms of food items, than that of BBS. It is, therefore, a more reliable and realistic assessment of the price movements of food items and essential commodities. If the cost of education and healthcare are included the rise in cost of living would even be higher than reported by CAB. Moreover, in food grains, CAB took into account all varieties of a particular item. For instance, its survey shows that all varieties of rice increased 2.87 per cent on average while the prices of all kinds of pulses soared 10 per cent on average. The CAB report highlighted the fact that the price of coarse rice consumed by low-income people recorded the highest increase. Some of the food items rose sharply during 2016, according to the CAB report. For instance, while domestic garlic saw a price increase of 47 per cent, the price of imported garlic rose by 72.06 per cent. The prices of sugar, salt, milk and meat went up between 6.0 per cent and 46 per cent last year. The BBS report does not capture the increase of these prices and thus gives a partial picture of the market faced by consumers in their daily life.
The sample of food items and essential commodities used by CAB in preparing their report is bigger than that used by BBS which causes the divergence between inflation and cost of living. As a measure of cost of living the inflation rate estimated by BBS is thus a less reliable indicator. To be a realistic measure of cost of living BBS has to take into account prices of more food items and essential commodities.     
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