Curbing inflation: Job is not done yet
The country has been experiencing high inflation in recent years, leading to an erosion in the real income of a large segment of the population. Though the central bank has maintained a tight monetary stance by keeping the policy rate unchanged at a high level for more than two years, inflationary pressures has not eased substantially. The annual average rate of inflation dropped to 8.68 per cent at the end of FY26 from 10.03 per cent in FY25. Moreover, on a point-to-point basis, the rate of inflation reached 9.16 per cent in June this year, the last month of FY26. The rate was 8.48 per cent at the end of FY25, according to the Bangladesh Bureau of Statistics (BBS) estimate. A point-to-point estimate usually provides a better picture of inflation.
As several factors have kept prices at higher levels over the last couple of years, it seems not that easy to bring them down. The central bank's tight monetary stance over the last two years has raised questions about its effectiveness in reducing inflation. It has also sparked the old debate over the factors of inflation.
Historically, there are two broad schools of thought regarding the causes of inflation. One belongs to the structuralists who view inflation as a structural problem. It means, inflation is 'essentially the inevitable result of trying to push development strategies without making the necessary structural reforms.' Proponents of the other school are monetarists who view inflation as a 'monetary phenomenon caused by inappropriate monetary and fiscal policies.'
The failure of the stabilisation policies pursued by many governments under the guidance of the International Monetary Fund (IMF) led to the development of the 'structuralist' school of thought in Latin America during the '50s and '60s. According to this view, inflation is essentially a phenomenon inseparable from the forced growth process pursued in the case of developing countries, overlooking various structural constraints. These include: factor immobility, market imperfections and rigidities and disequilibrium between supply and demand in different sectors of the economy. The 'monetarists', however, defended the official IMF position that inflation is a nominal phenomenon and could be controlled by appropriate monetary and fiscal policies. These two schools continue to have a very powerful influence on all economic analyses of inflation in developing countries, including Bangladesh.
M A Taslim, in his paper titled 'Inflation in Bangladesh: A Re-examination of the Structuralist-Monetarist Controversy' (The Bangladesh Development Studies, March 1982), discussed the issue critically. He concluded that both factors were at work behind the country's high inflation during the '70s.
After more than four decades, the mixed role of factors mentioned by both schools are found valid here. However, the role of the money supply in inflation is now more prominent in Bangladesh than it was three or four decades ago. The country's money market has expanded and also diversified to some extent, along with higher monetary transactions. Credit growth now responds more to changes in policy rates. Finally, inflationary movements are now linked to interest rate fluctuations more than they were two to three decades ago-all of which support the case for manoeuvring monetary policy to curb the rising trend of inflation.
Nevertheless, compared to advanced developing countries like India, the monetary tightening to curb inflation in Bangladesh has not yet reached an optimal level. In other words, the limitations of monetary policy are more evident here, given the strong presence of structural factors in the economy. For instance, even with sufficient food grain production to meet demand, the surge in supply costs may push inflation higher for the time being.
Bangladesh Bank's quarterly analytical note on inflation titled 'Inflation Dynamics in Bangladesh' provides some significant insights regarding the movement of inflation. It analyses the key determinants of Consumer Price Index (CPI) inflation and wage trends in Bangladesh. The report provides a decomposition of headline inflation, along with core, food, and energy inflation. It also highlights product-wise drivers of headline inflation every quarter.
The report on the last quarter of FY26 observed higher inflation, primarily driven by non-food inflation, particularly energy. "Energy inflation surged due to increased contributions from liquid fuels and gas prices. Solid fuels (such as firewood, agricultural by-products, cow dung, and jute sticks), with a total weight of 3.59, continue to be a major contributor to energy inflation," it added. The report also noted that the modest rise in food inflation in the last quarter was driven by protein-based items, which remained the largest contributor, accounting for nearly half of overall food inflation.
According to BBS, food inflation stood at 8.60 per cent in June this year, down from 9.06 per cent in May, reflecting a slight decline in the price level of food items. The rate was 7.39 per cent in June last year, indicating that food inflation did not ease significantly in the last fiscal year.
Non-food inflation also showed a slight decline in June this year to 9.61 per cent from 9.71 per cent in May. The rate, however, was 9.37 per cent in June last year, which means inflationary pressure originating from non-food sources prevailed in FY26.
On the annual trend of inflation, the report concluded that FY26 has reflected 'lower and more stable inflation across components' compared to the higher and more volatile patterns observed in FY25. The conclusion is based on a technical analysis, Kernel Density Estimates of Inflation, and may not fully reflect the real-world situation.
The central bank, in its quarterly report on the Bangladesh economy, also acknowledged that inflationary pressures remained a key challenge, continuing to erode the purchasing power of low- and middle-income households. It added that the government and the central bank are maintaining close policy coordination to bring inflation to a comfortable level. It is uncertain when inflation will come down to a comfortable level at or below 7 per cent. Moreover, by cutting the policy rate from 10 per cent to 9.50 per cent after 22 months, Bangladesh Bank has signalled that it is in a shifting mode to support growth rather than curbing inflation. It is also the recognition that monetary tightening has reached its limit and more focus on structural issues is required now.
Bangladesh Defense
