‘It will be difficult to capture the reality of inflation without incorporating the changing consumption patterns’

Bangladeshi think-tank South Asian Network on Economic Modelling (Sanem) recently published a study where they claimed the government heavily unestimated the inflation rate in the country.

According to BBS, the share of household expenditure on food consumption is 45.17 percent of the total expenditure for urban areas, and 58.54 percent for rural areas. Sanem's found that the rates were much higher: 61.13 percent for the urban marginalised household and 65.36 percent for the rural marginalised household.The Business Standard spoke to Professor Selim Raihan, the Executive Director of Sanem, to understand how they came up with such dramatically different figures and the implications of their findings. 

What methodology have you followed to conduct the study and why is the government food inflation figure this low? 

The Bangladesh Bureau of Statistics (BBS) calculates the average food inflation based on a common food basket for all, regardless of their income status or the region of the households. More precisely, the current method includes both the urban and rural population as well as the rich and the poor in the same food basket. This is inaccurate as the food consumption pattern of the marginalised households is different from that of the urban, high-income households. 

So, we studied eight marginalised groups. Four of them were from rural areas and the others were from urban areas. Our study found striking differences in the food inflation figure compared to that measured by the BBS.

According to BBS, the share of household expenditure on food consumption is 45.17 percent of the total expenditure for urban areas, and 58.54 percent for rural areas. Our study found that the rates were much higher: 61.13 percent for the urban marginalised household and 65.36 percent for the rural marginalised household. 

Firstly, the marginalised households cannot afford and therefore, do not consume a lot of items included in the typical consumption basket. For example, they consume coarse rice and cheap fish like Pangash, Koi and Tilapia. When we considered only the items these households typically consume, the inflation rate turned out to be around 10 percent to 12 percent higher. 

Secondly, the average inflation figure of BBS is based on the Household Income and Expenditure Survey (HIES) 2005-2006. So, the data that was used to calculate the inflation rate is outdated by 17 years, despite the data from HIES 2010 and HIES 2016 being available.  

More importantly, the relative importance of different goods in the consumption basket has changed over the past 15 years. For example, as the economy grew and the per capita income rose, the relative importance of protein gradually increased as well. 

Households that used to spend less money on protein may now spend a higher share of their income on protein-based diets, like meat. Similarly, the relative importance of rice has decreased while that of edible oil has increased.

Since the relative importance of goods in the basket is used as weights to calculate inflation, a dataset from 2005-06 is likely to underestimate the weighted values of different consumption goods and thereby underestimate inflation itself. If inflation remains underestimated, the real GDP, as well as the rate of growth, will be overestimated. This is why, in our study, we formed the final consumption basket based on a survey conducted in 2018, in association with the Planning Commission. 

In your opinion, why is there a reluctance to use more updated data in calculating the inflation rate?

I believe the cause is negligence. There may also be a lack of coordination. For instance, the government has changed the base year of the GDP to 2015-16, while the base year for inflation remained at 2005-2006. But the inflation rate also should have been changed at the same time.

So, I would first suggest the government use more updated data to form the consumption basket. It will be difficult to capture the reality of inflation without incorporating the changing consumption patterns. The more updated the dataset, the more accurate the picture. Moreover, the BBS was used to calculate inflation rates for different segments such as industrial workers in the past, though they no longer practise this. I would recommend doing the same for the marginalised, poorer households such as RMG workers, rickshaw pullers, etc., as well.

What is the implication of the real inflation rate on the marginalised people? 

Inflation usually hits the marginalised people the hardest because of their limited income. Any drastic change in the price of the goods they consume significantly affects them. While the government may consider the inflation to be low, based on the average inflation rate, in reality, the burden of inflation on the marginalised people may be much higher. 

To address this, the government should first identify a consumer basket containing goods typically consumed by lower-income households and take the initiative to keep the price of these goods at a tolerable level. The government should also take measures to expand the social protection programmes and make them more effective. 

How does the underestimation of inflation affect policy making?

The government introduces policies based on its understanding of the average inflation rate. If the food inflation figure is underestimated, the government may fail to take note of the actual reality. In such cases, the government cannot take the right initiatives at the right time to address the suffering of the marginalised consumers. 

What should the government do right now? What are your recommendations?

The price of essential commodities like rice, wheat, fish, meat and edible oil is increasing fast and it seems it will further increase because of the Russian invasion of Ukraine. The supply of some of these goods are dependent on imports and often beyond the control of the government. To address this, the government will have to think whether there is any scope of lowering the prices of imported foods and other essentials by lowering import duty. 

Many businessmen are trying to cash in on the situation. To tackle this, the government will have to increase monitoring on both the supply and demand sides.  The government must also increase coordination among relevant stakeholders. I know that it is a challenging task, but it must be done because I believe high inflation will not go away soon. It will make us suffer more in the coming days. The line for TCB's truck sales will only keep increasing as price levels rise beyond the reach of ordinary Bangladeshi citizens.