"Why the Prices are so High?"

By Mahdi Munshi

mahdimunsi@gmail.com

 

Graphics By: Aquib Rezwan

aquibrezwan0@gmail.com

Nowadays, oil prices in Bangladesh have risen so dramatically, and people have become so dissatisfied with the situation that the price of oil has become a laughing stock. Earlier this week, I saw in the news that an engaged couple got a 5-liter bottle of soya
bean oil as a wedding present. Who would have imagined that soybean oil would make an excellent wedding gift? Individuals are becoming more creative in their silent protest against this rising price of commodities, which made something so peculiar happen.

Today, every grocery shop owner and staffs in Bangladesh are tired of answering the same question — “Why is it so expensive?”. In this article, I will attempt to answer this question from a very general perspective — ‘what causes price hike (in general)’ and try to discuss subject matters like who are being benefitted by this economic phenomenon and how can someone address it.

 

The Economics behind Price Hike

The prices of commodities are bound to increase, which is a general rise in the price of everyday items. You are paying more for a vehicle or a house now than your parents paid when they were your age, and the reason behind it is ‘inflation’. You can't purchase as much for 100 BDT now as you could for 100 BDT a month ago because of it — a general rise in the cost of goods and services.

In the simplest sense, inflation is the decline of purchasing power of a given currency over time. It is the rate at which the value of a currency is falling and, consequently, the general level of prices for goods and services is rising (Investopedia). For the most part, the central bank of a country has authority and responsibility for regulating inflation rates via the regulation of market liquidity, which is the flow of money in the market.

Apart from this general, controlled rise of prices of goods, sometimes there occur some uncontrollable, massive price hikes. The central bank does not have much stimulus in this kind of inflation. Prices seem to rise way beyond people’s affordability and hurt the national economy. There are two types of such inflation based on what drives it — Demand-Pull Inflation and Cost-Push Inflation.

Demand-Pull Inflation

Demand-pull inflation is the most common cause for a price hike. When demand for products and services surpasses supply, it's known as a ‘demand-pull’. As a result, manufacturers are unable to satisfy demand and may not have enough time to increase production. It is also possible that they don't have enough skilled manpower or raw materials to manufacture it. The sellers or manufacturers realize that they can increase the price, since demand is way more than supply, putting them in the driver’s seat of the market.

Cost-Push Inflation

When prices rise due to increases in production costs, such as raw materials and labor, this is known as ‘cost-push’. The demand for commodities remains constant, but the supply of goods decreases because of rising manufacturing costs. As a consequence, the increased manufacturing costs are passed on to customers in the form of higher finished-goods pricing.

In the perspective of fundamental economics, these are the reasons behind the massive, uncontrolled increase in price — ‘demand-pull’, where manufacturers increase the price of a commodity in a demand surpassing supply situation; and ‘cost-push’ where manufacturers pass the increasing production cost to the customers by increasing the overall price of the products or services (trickle-down effect). These two forms of inflation can explain most of the real-life reasons for price hikes. I am going to discuss some of them in the next section.

 

What Causes Price Hikes?

Rapid Growth in Population

An increase in population means an increase in demands. The greater the demand, the more likely it is that the price of a commodity will rise.

Increase in Income

An increase in the incomes of a substantial part of the population increases demand for commodities, resulting in a price rise.

Inadequate Agricultural Output and Industrial Production

Inadequate agricultural and industrial production will create a deficit in raw materials for a number of goods. As a result, the price of the raw materials will go up, increasing the production cost for the commodities depending on them. Ultimately, the increased manufacturing costs are passed on to customers.

Natural and Other Disasters

Natural disasters such as floods, storms, and cyclones disrupt expected agricultural yields, which are typically raw materials for a variety of items.

Other calamities, such as war, can create price increases when the producing and exporting countries are involved. Currently, a lot of countries are going through terrible price hikes due to the ongoing COVID-19 pandemic and the Russia-Ukraine tension.

Hoarding

Hoarding is an unethical, unnatural way of creating a supply scarcity in the market. Often the sellers (not the manufacturers), the middlemen hold onto product lots and disrupt the supply chain in the market, where market supply is way lesser than the market demand, although production has been enough to address the demand. This way, they can increase the price of the commodities and gain unethical profit. This is a very common phenomenon in Bangladesh. The recent price hike in oil is also believed to be caused by hoarding by a lot of people.

These are only some of the reasons behind the price hike. In reality, a lot of factors are involved in the price hike.

 

Who Benefits from Price Hikes?

While inflation provides minimal benefit to consumers, it may provide a boost to investors who own assets in inflation-affected countries. Those who own shares in energy businesses, for example, may see their stock prices climb if energy costs rise. Some businesses benefit from inflation if they can charge more for their products as a consequence of increased demand.

Consumers are the ones that suffer the most as a result of price hikes, particularly those who are less financially fortunate. The middle class suffers the most since their demands and affordability are more difficult to match amid price hikes.

 

Can I Do Anything about Price Hikes?

The answer is yes, you can. While you might not beat price hikes or inflation by yourself, you can focus on a financial management approach to reduce the damages. What you can do is —

Look for Options

While prices start to rise, it's important that you exercise extreme caution while making purchases. Try a different, maybe less expensive, item in place of your go-to.

Reduce your Expenditures

To keep your spending from getting out of hand, search for alternatives to the items you need if easy swaps aren't available. Review all of your routine monthly expenses to determine if there is anything you can do without or anything you can downgrade.

Invest More

A well-diversified investment portfolio may help you earn enough to beat inflation. It's a good idea to take a moment to think about your long-term asset allocation, or you should reevaluate your risk tolerance and make necessary adjustments to your plan.