Causes of inflation

Cost-push inflation: It is inflation caused by an increase in prices of inputs like labour, raw material, etc. The increased price of the factors of production leads to a decreased supply of these goods. While the demand remains constant, the prices of commodities increase causing a rise in the overall price level.

For example: Globally, oil prices are rising and the global supply chain has been disrupted due to the Russia-Ukraine crisis leading to a cost push inflation in countries like Bangladesh.

Demand-pull inflation: It occurs when there is an increase in demand for goods and services. This type of inflation is typically caused by overall economic growth, technological innovations or a rising inflation rate. When this occurs, it can increase jobs and stimulate the economy but it drives prices of goods up.

For example : In Bangladesh there is income inequality which leads to spending disparity and also consumption disparity. A small portion of the population is spending and consuming whatever they want irrespective of price and supply. They are pushing the aggregate demand to a certain extent. This is creating demand-pull inflation.

Infograph: TBS

Phillips curve inflation: This kind of inflation is a common phenomenon after a big recession. The economy is entering the phase of recovery. Output goes up. Higher growth leads to lower unemployment – which in turn gives workers higher power of bargaining. Wages go up and cause wage-push inflation. This is demand-driven inflation, which economists describe as the Phillips curve effect.

For example: The Bangladeshi economy is recovering from the Covid-led recession, and so we are experiencing this demand driven inflation.

Major factors behind inflation in Bangladesh

Demand-pull inflation

1. Rising aggregate demand: Resurging consumer demand with post-Covid economic recovery
2. Expansionary Monetary Policy: Increased money supply by the central bank
3. Expansionary Fiscal Policy: Covid-19 subsidies and tax cuts by the government

Cost-push inflation:

1. Supply chain disruptions because of Russian invasion of Ukraine
2. Higher wage rate of workers
3. Increased cost of fertilisers, fossil fuel imports like petroleum and natural gas
4. Temporary export bans imposed by Indonesia, Argentina and India and increased cost of wheat and vegetable oil 
5. Depreciation of exchange rate
6. Domestic hoarding, e.g., soybean oil etc. expecting higher prices