Bangladesh inflation: Is it really as stable as it looks?

Mohid (a pseudonym), is a thirtysomething banker. When he first bought grocery with his own income in the mid-2015s, the price was understandably lower. Over the years, Mohid's income almost doubled. But he does not need to learn theories of inflation to understand the same grocery basket costs him a larger chunk of his income despite his income having doubled. 

Bangladesh has seen radical leaps in the economy over the last decade. The country's per capita income reached two thousand US dollar in the last fiscal year and it has more than doubled in the last decade, from $928 in the fiscal year of 2010-11 to $2064 in 2019-20.

Undoubtedly, people's food habits and buying behaviour has radically changed over time. Additionally, the Covid-19 pandemic has also changed its spending basket.  
According to the Bangladesh Bureau of Statistics (BBS), the inflation rate (year-on-year) in January this year showed a 5.02 per cent rise in what Bangladeshis paid for goods and services in the same month last year.

If we look into the trend of inflation rate in the time of Covid-19, we can see Bangladesh's inflation was pretty stable.

The county's inflation rate increased persistently from 5.48 per cent in March to 6.44 per cent in October, then sharply declined to 5.52 per cent in November and further 5.29 per cent in December.

This was driven entirely by the rise in food inflation from 4.87 per cent in March to 7.34 per cent in October and followed by a decline to 5.73 per cent in November and a further 5.34 per cent in December.

Devastating floods in Bangladesh last year (August-October) caused the price hike of rice, which led to food inflation in the country and thus the overall inflation went up a bit in that time.

However, except these months, how does the country's inflation rate remain stable in the time of Covid-19? What is the secret recipe to calculate the inflation rate so it seems stable?

The answer would be the 14-years old base year, which has kept the inflation stable during that period, instead of displaying the real spending scenario of Bangladeshis considering Covid-19.

The inflation rate base year needs to be revised

The base year refers to the year in which an index is set to 100, such as the consumer price index (CPI).  

The bureau of statistics of a government sets a value of a basket of goods and services – which is equal to 100 – for a chosen base year to monitor prices. 

It has been more than eight years since Bangladesh last changed the base year for its consumer price index to calculate the inflation rate in the country.

The base year for the consumer price index was changed in 2012 to the fiscal year of 2005-06 from 1995-96. 

Bangladesh is still calculating the inflation rate with the 14-years-old basket.

Since the fiscal year of 1973-74, in 47 years, the base year has been revised only three times – to 1985-86, then after nine years to 1995-96, and lastly after another nine years to 2005-06.

BBS monthly releases inflation rate for national, urban, and rural as measured by the CPI –a weighted average of the price change of the goods and services.

To compute CPI baskets, BBS collects prices of goods and services data from 140 main markets across the country, of which 64 are from urban, 64 are from rural and 12 are from Dhaka City Corporation area.

For the urban consumer basket, a total price of 422 commodities is included of which 151 food items and 271 non-food items, while the rural consumer basket contains 318 commodities of which 133 are food and 185 are non-food items. 

These items are assigned weights in the base year, based on a household's average expenditure on the item, expressed in terms of its percentage share in the total expenditure on all items. 

You will be surprised to know that the base year weights have been derived from Bangladesh's Household Income and Expenditure Survey (HIES) 2005-06, whereas the country has its latest HIES 2016 unveiled by the BBS in October 2017.

We have to agree that the food habits of Bangladeshis and the other non-food activities have changed over the years since 2005-06, the latest base year of consumer price index. This change in food habit as well as the drastic shift in urban lifestyle is not being addressed while calculating the CPI.

Then again it is needless to say that the Covid-19 pandemic changed our spending patterns, from medical care and health expenses to transports and communications.

However, to get the real picture of the economy considering the Covid-19 pandemic and to lead the economy, the government perhaps needs to revise the base year for its consumer price index to measure the inflation rate.

The author works as an assistant researcher at the Business Standard.