Taming inflation: Consumers’ role alongside monetary and fiscal measures
Despite concerted efforts by the government to tackle this issue, inflation remains a persistent challenge. In this context, the significance of monetary and fiscal policies, as well as consumer behaviour, in curbing inflation cannot be overstated
Inflation has emerged as a pressing concern for economies worldwide, and Bangladesh is no exception.
Despite concerted efforts by the government to tackle this issue, inflation remains a persistent challenge, impacting various sectors of the economy. In this context, the significance of monetary and fiscal policies, as well as consumer behaviour, in curbing inflation cannot be overstated.
Monetary policy, administered in Bangladesh by the central bank, holds substantial sway over economic conditions, including inflation. In Bangladesh, recent endeavours have seen the adoption of two consecutive contractionary monetary policies (July 2023 and January 2024) aimed at reining in credit flows, adjusting interest rates (removing the 6-9% cap), and rationalising currency exchange rates to near-stable levels.
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Such measures are designed to moderate demand-side pressures on prices by tightening the money supply and curbing excessive spending. Additionally, interventions to regulate inflationary expectations and manage inflationary pressures through monetary tools are crucial aspects of policy intervention by the Bangladesh Bank, although these measures have been taken somewhat belatedly.
Complementing monetary policy, government fiscal measures wield considerable influence in mitigating inflationary trends. In recent days, Bangladesh has witnessed strategic adjustments in fiscal policy, characterised by government spending and austerity measures (expecting the 2024-25 national budget to be reasonably sized with a marginal increase) and targeted tax reforms emphasising direct tax. The cessation of government borrowing from the central bank underscores concerted efforts to address inflationary pressures.
Moreover, exemptions of value-added tax (VAT) and customs duties on selected imported consumer goods during the last holy month of Ramadan were commendable initiatives. Strategies to enhance domestic production, coupled with measures to stimulate investment and foster economic diversification, are integral components of fiscal policy aimed at bolstering supply-side dynamics and mitigating inflationary risks in an economy operating at "less than full employment levels."
The synergy between monetary and fiscal policies is paramount to achieving macroeconomic stability and controlling inflation in a developing country like Bangladesh. Coordination between these policy instruments is essential to address both demand-side and supply-side factors driving inflation.
While monetary policy focuses on managing aggregate demand through interest rate adjustments and liquidity management, fiscal policy targets the underlying structural drivers of inflation by fostering investment, enhancing productivity, and promoting inclusive growth.
Effective coordination in a timely manner ensures a comprehensive approach to inflation management, thereby enhancing the efficacy of policy interventions and safeguarding macroeconomic stability.
However, in a market economy, consumers play a pivotal role in the economy's equilibrium.
As commodities are priced at the intersection of market forces like demand and supply, consumer awareness becomes crucial to shaping market dynamics. Through mindful consumption practices and avoiding unnecessary panic buying and hoarding, consumers can help maintain equilibrium between supply and demand, thereby preventing unwarranted price escalations.
The frequency and timing of purchases significantly influence market equilibrium. By adopting more efficient purchasing practices, such as buying goods on a weekly basis instead of bulk-buying at the beginning of the month, consumers can help stabilise demand throughout the month. This can prevent sudden surges in demand that result in price increases.
By raising concerns about price gouging or unethical business practices, consumers can exert pressure on businesses. Educating consumers about their rights, market dynamics, and the impact of their purchasing decisions empowers them to make choices that contribute to price stability and mitigate inflationary pressures. Unfortunately, organisations like the Consumers Association of Bangladesh have failed to play any remarkable role in demand-side management.
In conclusion, the efficacy of monetary and fiscal policies in controlling inflation is indispensable. The role of individual consumers in rationalising and stabilising prices is no less important. By adopting a multifaceted approach that addresses both demand- and supply-side factors, it is possible to mitigate inflationary pressures and foster an environment conducive to investment, productivity, and equitable development.
Mahbub Ahmed is a former senior secretary of the Finance Division.
