Causes of Increase in Price of Essentials in the Last Five Years

Term Paper Causes of increase in price of essentials in the last five years Department Of Economics East West University Submitted by: Afia Ibnat Sajoti : 2012-2-31-118 Nusrat Jahan : 2012-3-30- fzuuiuhio Date of submission: Table of contents: 1. Abstract………………………………………………………………………………………………………………1 2. Abstract: Increases in price level are also referred to as inflation.

Such price increases in an economy are usually due to the effect of macroeconomic factors like demand, supply and consumption. All other macroeconomic factors that affect increases in price level are somehow related to these three factors. Those other areas include interest rate, monetary policies and Gross Domestic Product (GDP). Since mid-2007 basic food prices have rocketed with disastrous consequences for poor consumers.

The spike in international market prices through the first half of 2008 has now subsided. Still prices of rice, wheat, corn (maize), and edible oils remain well above the levels of just a year ago and are likely to remain elevated and volatile for years to come. Two separate dynamics need to be understood in order for countries to make necessary adjustments.

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A gradual rise in food prices has been under way since at least 2004 with three general and fundamental factors at work: rapid economic growth in the People’s Republic of China and India especially put upward pressure on prices as demand simply outpaced supply; a sustained decline in the United States dollar since mid-decade added to the pressures on dollar-denominated international market prices; and a combination of high and rising fuel prices coupled with legislative mandates to increase production of biofuels has established a firm link between petroleum prices and food prices.

The causes of price spikes are crop-specific. Drought and disease in 2007 caused wheat prices to jump, and supplies of edible oil were reduced as farmers in the United States shifted acreage out of soybeans into corn for nonfood uses (ethanol). Rice is the clearest example of crop-specific causes—the price spike was driven by export bans that were aimed at helping contain domestic food price inflation in exporting countries, but had the unintended effect of setting off panic as supplies to the already thin world rice market were sharply reduced.

Asia will need several years of good rice harvests in order to stabilize the situation and reduce the exposure of the poor to another shock in food prices. This will not be easy to achieve as input costs are driven higher by high energy prices. Thus, it seems unlikely that world food prices will return to the declining trend seen between the mid-1970s and the first few years of this century. Introduction:

The world prices of wheat, coarse grains, rice and oilseed crops all nearly doubled between the 2005 and 2007 marketing years and continued rising in early 2008. These increases in agricultural commodity prices have been a significant factor driving up the cost of food and have led to a fuller awareness and a justifiably heightened concern about problems of food security and hunger, especially for developing countries.

The causes of this price spike are complex and due to a combination of mutually reinforcing factors, including droughts in key grain-producing regions, low stocks for cereals and oilseeds, increased feedstock use in the production of biofuels, rapidly rising oil prices and a continuing devaluation of the US dollar, the currency in which indicator prices for these commodities are typically quoted. This turmoil in commodity markets has occurred against the backdrop of an unsettled global economy, which in turn appears to have contributed to a substantial increase in speculative interest in agricultural futures markets.

Tight market conditions for essential agricultural commodities pose policy challenges for national governments as well as for international organizations. In order to take the right policy decisions, we need to understand what caused the current price spike, what the implications may be for prices and price volatility in the future, and how various countries and members of society may be affected. This note aims to improve this understanding and thereby to contribute to sound policy formulation. Purpose and Scope:

Price hike of essential commodities created various problems in the economic growth of Bangladesh. The main purpose of this paper is to provide a clear picture of price spike and its reasons, how it is creating problems in Bangladesh and in the global economy. This paper examines the issues at stake in light of rising food prices and This paper covers the present market situation of price movements that is about more or less within the year 2005 to 2011. This research only covers the essential commodities. Overall price movements of the economy are not the concern of this paper. Literature review:

The focus of this literature review thus far has been price discovery in the beef sector. There are also several additional issues related to price discovery that should be considered. Among these issues are price transmission and identity preservation. By reading economical research PRICE OF DAILY ESSENTIALS: A DIAGNOSTIC STUDY OF RECENT TRENDS by Centre Policy Dialogue (CPD) it mentioned that Price hike of essential commodities has been one of the major challenges facing the incumbent Caretaker Government (CTG) of Bangladesh. The economy has been experiencing a creeping inflation over the recent past.

Two most distinctive features of this inflationary trend had been the following: (i) increase in food prices had been more than that of non-food prices, and (ii) consumer price index was higher in the rural areas than in the urban counterparts. These trends had adverse implications particularly for the poorest segments of the society, given that there has not been any tangible increase in their real income. It broadly provided the current situation of our economics by showing an analysis of the supply chain of selected essentials items and distribution of recent commodity prices like rice, wheat flour, potato, onion, vegetables, eggs etc.

It also demonstrated the current supply situation of selected essential items and projections like to estimate national demand for essential commodities for 2007, import scenarios in 2007, product-wise global production and price scenarios, comparison between Indian and Bangladeshi retail prices etc. Methodology: This research is conducted on the basis of secondary information and the market research done by various parties.

Information has been collected from relevant papers and documents provided by the different governmental departments and international organizations, publications of different research think tanks and newspaper and web site. The steps that can be taken are This term paper is based on secondary data. It is a quantitative and research. Data is mainly from some renowned institutions like CPD, BB, BIDS, BBS, BEA, IPB etc. Limitations: Due to data limitation, this assessment is done by a simple methodology of comparing pre and post price shock. The literature reviewed in this study covers many of the topics important to price discovery.

However it should be noted that the literature covers many decades of work by many authors. Therefore this study has focused on the significant and broad based work found in the literature. FINDINGS AND ANALYSIS Price changes and trends Global food and oil price hike have also increased the bar of food price in the local market. The food price of essential commodities has been increasing hastily since 2005 and climbed at the highest peak of the decade in 2008. However, prices declined a bit in 2009 but again started to increase since 2010 and till November 2011 prices of most of the essential commodities has risen more than those of 2008.

If taken 2005 as the base year, the scenario of food prices in 2011 becomes a matter of stun and awe. From the table- 1, it is comprehensible that the prices of coarse, medium and fine rice have been doubled in 2011 than those of 2005. The price of Atta (white) increased by 83. 33 percent by November compared to 2005. The price of soybean and palm oil increased by 147 percent and 151. 22 percent respectively by November 2011 relative to 2005. The price of garlic in 2005 was Tk. 54/Kg while it increased by 122. 22 percent by November 2011. The prices of different types of pulses have increased over the years at an incredible rate.

The prices of baby food items, powder milk and sugar are also on an upward movement. It might be very difficult for the poor people to manage three meals a day when the prices of essential commodities are on the rise at an accelerating rate and volatile. As a result of this volatile nature of the price of essential commodities, the poorest segment and the limited earners are in great distressed. Consumer Price Index and Trend of Food and Non-food Inflation A measure that examines the weighted average prices of a basket of consumer goods and services, such as transportation, essential food and medical care.

Specially, here we consider consumer goods i. e. ;essential food items. However, the CPI measures how much the price of consumer goods has changed over a given time period. It measures the inflation and deflation. If the large rises in CPI during short period of time indicate a period of inflation and large drops indicate deflation. From the table-2, it is caught sighted that recent data indicates the upward trend of consumer price index (CPI) in general and prices of essential commodities exceeds beyond the limit of poor income group or fixed earners. National (CPI) average is 10. 24 percent and 12. 2 percent for the month of October’ 2011. While the food prices of rural areas continued to boost at an accelerating rate compare to the food prices of urban. It is really a threat for the developing country like Bangladesh. This is clearly shown in the figure-1. Causes of the Current Increase in Food Prices * Black Marketing: In some cases, when governments or regulatory bodies set a maximum price for a good, this leads to black markets. To be effective, the maximum price has to be below the market price that prevails as a result of the interaction of demand and supply. For example, the market price of wheat is $5.

The government is regulating the industry and fixes a price of $4 as the maximum price. Supply of wheat is going to reduce and demand is going to increase based on the laws of demand and supply. This will lead to a shortage as people are demanding more wheat than is being supplied. Some consumers will be willing to pay the original market price for wheat ($5) and some will be willing to pay even higher. This leads to a black market where suppliers will provide the willing consumers with wheat at a price higher than the prevailing one. It broadly means holding the inventories and selling it at a higher price.

It creates artificial scarcity in the economy in spite of increase in production and results in price rise, * Black money: Black money encourages the people to the demand of goods and services in the economy thereby leading to high rise in the general price level. Tax evasion here is widespread with a new study by the finance ministry finding that undeclared income or ‘black money’ could account for up to 80 per cent of Gross Domestic Product — some $110 billion. Bangladesh Institute of Development Studies (BIDS) Research Director Binayak Sen argued that the housing sector has seen one of the most visible growths. … why only took 450 to Tk 500 million is earned as tax and why the number of people having above Tk 200 million property is only 4000?...... It should not be less than 20 to 30 million if the valuation is calculated at market rate and not at the source rate,” said Binayak. Economists hold the view that black money breeding can become a major factor behind persistent inflation through misallocation of resources and shifts of resources from productive investment to current profligate consumption. Rapid Growth of Population: The rapid growth of population means more mouths to feed, more demand of clothing and basic necessities as compared to supply of goods and services which result in price rise. Several population factors play an important role in the increasing and changing nature of the demand for food, while also constricting supply and access to food. The population's role is often neither direct nor simple, and its impacts can vary at the local and global level.

Nonetheless, many demographic trends that affect food supply and demand, especially rapid population growth, urbanization, population density of the rural poor, and migration for employment, are projected to continue. Urbanization, the growth of the middle class and associated changes in consumption patterns, migration and wage employment, large family size are all contributing factors as well. * Deficit Financing: Deficit financing, practice in which a government spends more money than it receives as revenue, the difference being made up by borrowing or minting new funds. Although budget deficits may occur for numerous reasons, the term sually refers to a conscious attempt to stimulate the economy by lowering tax rates or increasing government expenditures. It means printing more currency notes and coins. Deficit financing is done mainly to meet the budgetary deficit. It results in more supply of money in the economy but when the increase in the supply of money corresponds with less increase in the supply of goods and services (National output) there is a rise in the price of goods and services * High and rising price of energy: Energy and agricultural prices have become increasingly intertwined. With oil prices at an all-time high approaching $150/barrel, the U.

S. government is subsidizing farmers to grow crops for energy. The U. S. farmers have massively shifted their cultivation towards bio-fuel feedstocks. High energy prices have also made agricultural production more expensive by raising the cost of mechanical cultivation and fertilizers, as well as marketing including cost of transportation. At the same time, the growing world population is demanding more and different kinds of food. * Rapid economic growth: Rapid economic growth in many developing countries, especially China and India have pushed up consumers' purchasing power, generating increased demand for food.

This has shifted food demand away from traditional staples and toward higher-value foods like meat and milk. In the last five years, the world economy has grown on average by 8. 6% per year. The means our incomes have increased by this amount in real terms every year. Most of the contribution to economic growth has come from service industries, and manufacturing industries to a lesser extent. On the flip side of this, the agricultural sector has seen extremely poor growth in the last five years. While the overall economy has been growing 8. 6% per year, the agricultural sector has grown by a paltry 3. % per year in the last five years, on average. Thus, our income is rising a lot faster than food production. Demand is rising much faster than supply, and this is causing the high levels of food price in inflation. In addition, population is also growing by 1. 3% per year, further increasing the demand for food. * Dollar- depreciation: The rapid depreciation of the dollar against the euro and some other important currencies drives up the price of commodities quoted in dollars for both supply and demand reasons (see below). The depreciation of the dollar also causes investors “long” in dollars (i. e. most US-based investors, but holders of dollars globally as well) to seek hedges against this loss of value, with commodities being one attractive option. a sustained decline in the dollar since mid-decade added to the upward price. Pressure on dollar-denominated commodity prices directly, and indirectly fueled a search for speculative hedges against the declining dollar. Increasingly since 2006, these hedges were found first in petroleum, then in other widely traded commodities, including wheat, corn, and vegetable oils. * Increase in Money Supply: Money supply includes currency notes and coins, demands and time deposits.

Increase in money supply shows that people in an economy are ready to spend more money for buying goods and services. Conclusion Essential commodities especially food in our country are important concerns at policy level to ensure the welfare of the mass people. In this regard price hike comes to top most concern with respect to food security because if the price hike causes food insecurity for the mass of the people of our country. Availability of food, though indispensable for food security, is not enough to significantly improve food security at the household level.

For improved household food security, all our efforts are needed to ensure nutrition of the poor through improving their accessibility to food and ensuring full biological utilization of the food. The overall food security can be well attained when increased accessibility to food is ensured through enhanced skill in domestic agriculture and increased availability of cereals and non-cereals, through attaining food accessibility by a sustained increase in the income of the poor and through education and health services leading to effective utilization of food of the malnourished people.

It is expected that the people of the country will be able to enjoy their desired needs through essential commodities. For ensuring this situation price hike in essential commodities are to be taken into control. All the government initiatives should be targeted to increase production, reducing costs, ensure fair competition (competition law may be enacted and enforced) and gaining confidence of the business community and by ensuring these supplies could be increased and be able to keep pace with demand and price could be handled. References 1. Bangladesh institute of development studies (BIDS)

Global Commodity Price Volatility and Domestic Inflation: Impact on the Performance of the Financial Sector in Bangladesh. 2. Center For Policy Dialogue PRICE OF DAILY ESSENTIALS: A DIAGNOSTIC STUDY OF RECENT TRENDS A report prepared for the Ministry of Commerce, Government of Bangladesh 3. Bangladesh Bureau of Statistics (BBS) 4. The Finance Express (FE) Rising food prices in Bangladesh: Causes, poverty impacts and policy actions 5. International Journal of Economics, Commerce and Research Current State of Price Hike In Bangladesh: An Analysis Of Food Items. 6. Bangladesh Economic Association (BEA)

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