Runaway non-food inflation remains the bigger culprit, but unchecked

Bangladesh has one of the world's lowest food inflation rates, but unbridled non-food price hikes keep the country's general inflation high, pushing the monthly consumer price index to 9.24% as of April.

Fighting inflation is one of the key challenges identified for the next fiscal year as Finance Minister AHM Mustafa Kamal places the new budget on Thursday.

This is the fourth month the headline inflation crossed 9% since August last year when the government hiked fuel oil prices by a maximum of 51% to reduce subsidy pressure. And inflation marked a steep jump right from that month, reaching a historic high of 9.52% from 7.48% the month before. Though indices of both food and non-food groups rose, the hike in non-food prices was bigger than for food items.

Non-food inflation remained above 9% since September, and almost touched a double-digit at least in two months, a trend never seen so high in Bangladesh's history.

Food inflation marked a steady decline for five months until January, cooling headline inflation to some extent and keeping it below 9% until April, except for March.

The scenario goes in stark contrast to the global phenomenon as most other countries — rich and poor alike — are fighting food inflation more than non-food ones. While well-off nations focus more on relieving people from the major cost of living pressures like housing, energy, health, and transportation, Bangladesh concentrates on food items.

Market intervention, duty cuts and drives are focused on the food market, and farm subsidy is directed to encourage food production — all contributing to the lower food indices. And non-food expenditures, which account for the lion's share of living costs, remain beyond all such interventions, keeping people exposed to unchecked cost hikes in rent, transportation, healthcare, education and clothing, an analysis of inflation statistics shows.  

In real terms, food price inflation exceeded overall inflation (measured as year-on-year change in the overall CPI) in 90.6% of the 161 countries, according to the World Bank's food safety update released on 23 March.

It says 85.7% of high-income countries are experiencing high food price inflation. The countries affected most are in Africa, North America, Latin America, South Asia, Europe, and Central Asia, the update says.

Food prices have continued to rise across Europe despite overall inflation dropping for a second consecutive month in December, according to data shared on Wednesday by Eurostat, the European statistics agency.

Bangladesh does not belong to this majority bloc.

Food inflation is higher in most of the countries in the world than in Bangladesh.

People in at least 145 countries from lower-middle income to high income are battling with the spiralling cost of living crisis because of surging food prices. Only 24 countries currently have lower food inflation than Bangladesh, according to the global lender's report.

Yet that's not a point of complacency. The reality on the ground is not much inspiring as the food inflation, though lower than non-food, is still high for average Bangladeshi consumers who have never experienced such a spiralling cost of living in a lifetime. The World Bank update says increasing reliance on imports, especially for wheat, has limited the domestic food supply and kept year-on-year food inflation high, limiting consumer purchasing power in Bangladesh.

"High food prices tend to affect the most vulnerable segments of the population the most because poorer households spend a larger share of their income on food," the World Bank says.

International Monetary Fund (IMF) chief Kristalina Georgieva warned that the sharp slowdown in the world economy, which stemmed from the pandemic and has been aggravated by the Russia-Ukraine war, would continue this year.

Slower growth would be a severe blow and make it even harder for low-income nations, hamstrung by slower demand from export markets and with lower per-capita income, to catch up, she explained. Poverty and hunger that increased during the coronavirus pandemic could climb, the IMF chief feared in her comments on 7 April.

Though both food and non-food inflation was around three percentage points higher in March than the pre-war level, efforts like market drives, import facilitation and duty cut before and during Ramadan, could prevent food inflation from spirally further.

But the non-food inflation continues to stay almost out of focus and remains a big worry for people of low and fixed incomes, whose spending for rent, transportation, children's education and family healthcare surged.

BBS inflation data shows Bangladesh's non-food inflation exceeded overall inflation for the last eight months.

Non-food inflation has never been so dominant in the Consumer Price Index (CPI) in Bangladesh like today. Inflation of goods and services other than food has remained close to double-digits for the last seven months, a phenomenon never seen since the independence of Bangladesh.

Food inflation was higher than non-food inflation a year ago in February when the Russia-Ukraine war began. And this trend continued until the government increased fuel prices in August last year. The abrupt and huge fuel shock added to people's expenditures directly and indirectly since it inflated energy bills for households, industries and transportation as well.     

The all-important question is: Is it possible to tame non-food inflation without reducing energy prices?

Though global fuel oil prices dropped from their peak, there is no indication that the government-administered domestic price will be reduced soon. Rather the government is committed to implementing its 'zero subsidy' in energy pledge agreed to get the IMF's $4.7 billion loan.

Therefore, more price hike in energy is not unlikely. In such a case, taming inflation remains a herculean task, but not entirely impossible. Experts have long been suggesting some well-known effective measures including the withdrawal of taxes on imported fuel oils to ease the cost of living.   

Bangladesh's non-food CPIs include rent, fuel and lighting, medical care, transport, education along with some other household expenses.  

Reining in the increase in social spending to reduce people's out-of-pocket expenditure in health and education has long been in discussion.

Improvement of public transport to reduce household transportation costs remains a long unmet demand.

Reining in house rent by enforcing or updating rental laws and regulations could protect low and middle-income people.

One of the major ways to tame non-food inflation is cutting taxes on fuel, which is a major source of revenue for the government. According to NBR, fuel imports were subject to a 34% tax incidence, including 10% customs duty, 15% VAT, 5% advance income tax (AIT), and 2% advance tax (AT). In addition, there is a 2% VAT at the consumer level. The revenue authority may withdraw the 5% AIT on all petroleum products, according to a pre-budget report of The Business Standard.

The next budget, while setting the inflation target at 6% — lower by more than three percentage points from the current level — should address those issues responsible for increasing the cost of living disproportionately, and help people with average incomes have two ends met.