Report- Inflation Drops to 24-month Low in October 2012

The headline inflation (CPI inflation — point-to-point) of

Bangladesh declined to 7.22% in Oct’12 — the lowest in 24

months or equivalent to a 2-year period according to the old

base year (1995-96). The inflation seemed to be easing due to

fall in food inflation which dropped from 6.16% in Sep’12 to

5.57% in Oct’12. The non-food inflation, however, soared from

9.95% in Sep’12 to 10.46% in Oct’12 - mainly due to recent

upward revision of electricity tariffs. Overall, the headline

inflation has been following a decreasing pattern since Feb’12

which slide into single-digit in Apr’12. The twelve-month

average of headline inflation stood at 9.38% in Oct’12; heading

towards the 7.50% target set out in the FY13 budget.

Food Inflation:

Food inflation (old base) has been showing a decreasing

trend from Oct’11 and reached to 5.57% in Oct’12 which is

significantly lower than its twelve-month average of 8.23%

in the same period. Comparatively stable prices of main

staples and a sufficient rice supply drove the food inflation

down.

Good Aman and Boro harvests caused increase in the

production of rice, the heavily weighted staple in food

basket. Total gross domestic production of food grains

(rice and wheat) reached to 34.79 million metric ton in

FY12, registering 0.81% YoY GR. Sufficient production of

food grains resulted in 63.06% YoY drop in food grain

import in the same period.

On the backdrop of declining food grain import, total import

growth of consumer goods also fell by 3.48% YoY in FY12

and 8.21% YoY in 1Q’FY13. Share of food grain import in

consumer goods import also plunged from 52.97% in FY11

to 25.49% in FY12.

We expect, however, a future increase in the food inflation

in Bangladesh. That is because, the prices of the food

items are steadily climbing up in the world market

subsequent to droughts and adverse weather conditions in

the major food growing countries and Bangladesh is still

import dependent to meet up her food gains demands.

Food inflation, according to new base year (2005-06),

already witnessed a rise in Oct’12 by 0.76% and reached

to 2.51%.

World Food Index has picked up a rising trend since Jul’12

and reached to -2.29% in Oct’12 on YoY basis. It usually

has a lagged effect on the country’s food inflation.

Inflation Drops to 24-month Low in October 2012 Bangladesh Macroeconomic Update December 03, 2012

Done by: Farazi Sayeed Ahmed [email protected]

Editor: Qazi Musaddeq Ahmad (Analyst)

[email protected]

Source: Bangladesh Bureau of Statistics, December 2012

Figure 1: Headline Inflation & 12-month Average (old base)


Figure 2: Food Inflation (old base)

Source: Bangladesh Bureau of Statistics & FAO, December 2012

Figure 3: World Food Price Index & Bangladesh Food Inflation (old base)

5.00%

7.00%

9.00%

11.00%

13.00%

15.00%

Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12

Food Inflation (Point-to-Point) Food Inflation (12-month Avg)

0.00%

3.00%

6.00%

9.00%

12.00%

15.00%

18.00%

-40.00%

-20.00%

0.00%

20.00%

40.00%

60.00%

80.00%

Bangladesh Food Inflation GR (YoY)

World Food Index GR (YoY)

World Food Index GR (YoY) Bangladesh Food Inflation GR (YoY)

6.00%

7.00%

8.00%

9.00%

10.00%

11.00%

12.00%

13.00%

CPI Inflation (Point-to-Point) CPI Inflation (12-month Avg)

2

Inflation Drops to 24-month Low in October 2012

Non-food Inflation:

The inflation rate of non-food items reached the double-

digit figure again just after two months in Oct’12 primarily

due to an extensive hike in the electricity in Sep’12. The

non-food inflation (old base) reached to 10.46% in Oct’12

with a twelve-month average of 11.83%. According to new

base, it reached to 11.28% in Oct’12 from 10.18% in

Sep’12.

Rises in the average house rent and the transportation

costs also fueled the non-food inflation as they both

contain significant weights in measuring inflation.

A pressure from the demand side also observed following

record level of remittance inflow in Oct’12 (USD 1.45

billion, 39.90% YoY GR); stimulating the non-food inflation

with higher consumer spending especially in times of

festivals.

The electricity tariff for both retail and bulk users increased

by 38.24% and 63.77% respectively from Dec’11 to Sep’12

period. Increased production cost due to commissioning of

expensive fuel-based power plants in recent times and

pressure to cut government subsidy on energy were the

main drivers for upward revisions in electricity tariffs in

quick intervals.

In international market, fuel price has been stable since

Aug’12 till date at around USD ~112 per barrel (brent

crude) after reaching 44-month high in Mar’12 of USD

124.93 per barrel. Still, in recent times, fuel import by

Bangladesh witnessed a decline of 7.49% YoY in 1Q’FY13

compared to 40.96% YoY GR recorded in FY12. Primary

reasons for such decline in fuel import were to ease

pressure on foreign reserve and to reduce subsidy on

energy sector (use to cover the large mismatch in end-user

electricity tariff and production cost per unit). Many fuel-

based costly rental power plants still remain under-utilized

due to restrictions on full continuous operations.

Non-food inflation and fuel import showed strong positive

relationship in Jan’12-Oct’12 period (correlation coefficient

of 0.79). Oil import bill is usually being financed by upward

revision of electricity tariffs and government subsidy.

New and Old Bases:

In Aug’12, Bangladesh Bureau of Statistics disclosed a

new base year for calculating inflation rate to give a more

representative index of prices in the changing economic

environment. The year 2005-06 is set as the new base

year, while the old base year is 1995-96.

From May’12 to Sep’12, inflation rates calculated based on

two bases followed similar pattern with correlation

coefficient of 0.96. In Oct’12, however, inflation rate (new

base) witnessed 0.90% rise, while inflation rate (old base)

went down by 0.17%.

Difference in inflation rates between the two base years

results as some food and non-food items were included in


Figure 4: Non-food Inflation (old base)

Source: Bangladesh Bank, December 2012

Figure 5: Non-food Inflation and Oil Import


Figure 6: Headline Inflations (old base & new base)

Source: Bangladesh Power Development Board (BPDB), December 2012

Table-1: Power Tariff Revisions

Retail Users Bulk Clients

Period New Price % Change New Price % Change

Dec-11 4.71 13.24% 3.34 16.38%

Feb-12 5.02 6.58% 3.74 11.98%

Mar-12 5.33 6.25% 4.02 7.49%

Sep-12 5.75 7.80% 4.70 16.92%

2.50%

4.50%

6.50%

8.50%

10.50%

12.50%

14.50%

16.50%

Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12

Non-food Inflation (Point-to-Point) Non-food Inflation (12-month Avg)

0.00

7.00

14.00

21.00

28.00

35.00

42.00

49.00

56.00

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

14.00%

16.00%

Oil Import (BDT in billion)

Non-food Inflation

Oil Import (BDT bn) Non-food Inflation

4.50%

5.50%

6.50%

7.50%

8.50%

9.50%

May-12 Jun-12 Jul-12 Aug-12 Sep-12 Oct-12

Inflation Rate (%)

Old Base (1995-96=100) New Base (2005-06=100)

3

Inflation Drops to 24-month Low in October 2012

the new inflation basket, while some old items were

excluded.

Monetary Policy Stance:

The existing restrained monetary policy adopted by

Bangladesh Bank (BB) is one of the key reasons for

slowing down inflation. As excessive supply of money

causes inflation, BB in its last MPS (Monetary Policy

Statement) for 1H’FY13 continued setting lower M2 growth

target of 16.00% which was 18.50% in 1H’FY12.

Consequently, actual M2 GR fell from 19.60% YoY in

Sep’11 to 18.24% in Sep’12. The private sector credit GR

also plunged from 21.98% in Sep’11 to 19.88% in Sep’12.

In 1Q’FY13, net government borrowings from banking

sector slowed down considerably, registering 13.93% YoY

GR in Sep’12 against 50.37% YoY GR in Sep’11. Most

importantly, borrowings from BB (which directly adds to

high-powered money) recorded a negative 2.35% YoY GR

in Sep’12. Such lower borrowing from the BB has helped to

decrease the reserve money growth in recent months.

Comparison of Inflation Across Countries:

Most of the emerging Asian economies have been troubled

by increased inflationary pressures following two episodes

of quantitative easing in the US. However, as the analysis

shows, so far Bangladesh has successfully managed such

pressure in more efficient manner compared to its

neighbors.

During 2007 to 2012 (up to Oct’12) period, the inflation in

Bangladesh observed the lowest variation among the

inflation rates of Pakistan, India, Sri Lanka and Vietnam.

The inflation rate of Bangladesh is also the 2nd lowest

among the inflation rates of the aforementioned countries.

During the same period, inflation of Bangladesh has a CV

(Coefficient of Variation) of 12.79%. While CV of Pakistan’s

inflation is 46.91%, CV of Indian’s inflation is 25.09%, CV

of Sri Lanka’s inflation is 57.89% and CV of Vietnam’s

inflation is 43.59%.

Going forward:

We expect non-food inflation to decrease in the remaining

months of FY13 on expectation of stable BDT-USD

exchange rate, stable global fuel prices and very low

possibility of near-future electricity price-revision.

We anticipate slightly deteriorated food inflation scenario

due to global factors. Furthermore, the growth target set for

monetary bases are highly unlikely to be realized

considering increased government expenditures, budget

deficits and aspiration to achieve 7.2% GDP growth in

FY13.


Figure 7: M2 GR (YoY) and Headline Inflation (old base)

Table-2: Broad Money, Private and Public Sector Credit GR

Target set in

1H’FY13 MPS Achieved up

to Sep’12

Broad Money (M2) 16.00% 18.24%

Pvt. Sector Credit GR 18.30% 19.88%

Pub. Sector Credit GR 13.50% 13.93%

Source: World Bank, December 2012

Figure 8: Inflation Across Countries


6.00%

7.20%

8.40%

9.60%

10.80%

12.00%

13.20%

16.00%

17.50%

19.00%

20.50%

22.00%

23.50%

25.00%

Inflation Rate (%)

M2 GR (YoY)

Broad Money (M2) GR YoY Headline Inflation

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

2007 2008 2009 2010 2011 2012 (Oct)

Inflation Rate (%)

Bangladesh Pakistan Vietnam India Sri Lanka

Table-3: Statistical Findings [2007— 2012 (Oct)]

Std Dev Variance Mean CV

Bangladesh 1.12% 0.013% 8.78% 12.79%

Pakistan 5.91% 0.349% 12.59% 46.91%

Vietnam 5.52% 0.305% 12.67% 43.59%

India 1.78% 0.032% 7.08% 25.09%

Sri Lanka 5.66% 0.321% 9.78% 57.89%

Sources: World Bank, BRAC EPL Research, December 2012

Report- Inflation Drops to 24-month Low in October 2012

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