Originally posted in bdnews24.com on 26 January 2025
Why is rural Bangladesh seeing higher inflation than cities?
Economists blame increased production costs and higher VAT for the pressure on rural households
The average inflation rate in Bangladesh from January to December 2024 was 10.34 percent.
This means a consumer who spent Tk 100 on a product in 2023 paid Tk 110.34 for the same in 2024.
Rural residents also bore the brunt of this price hike throughout the year.
Adding to this burden, the interim government increased value-added tax, or VAT, excise, and supplementary duties on over 100 goods and services midway through the fiscal year, in January.
Economists believe these measures to boost revenue collection will aggravate inflation, putting low and fixed-income rural people under greater pressure.
Even without understanding the complex calculations behind inflation, Roni Thakur, a resident of Gopalganj’s Muksudpur, shared his struggles.
After his father’s death from cancer, he had to quit his studies and assume responsibility for supporting his family.
The sole source of income for the mother-son duo is their agricultural land.
Struggling to cope with high prices, the 25-year-old told bdnews24.com that hosting guests from his sister’s home often leaves him in dire straits.
In recent months, Roni even considered selling land to manage rising expenses, expressing his despair.
Government data shows that from April to December 2024, inflation for non-food items was consistently higher in rural areas than in urban ones.
The same trend was observed for food inflation in April, August, and October.
While disruptions caused by protests, conflicts, floods, and political transitions explain the higher inflation in August and October, the reasons for April remain unclear.
The reason behind higher inflation in rural areas appears to be the steep prices of goods imported from abroad and supplied from other regions.
While locally produced agricultural goods tend to be more affordable, rural areas often see less variation in prices compared with cities.
In some cases, inflation drives rural prices higher than urban ones.
Noyon Sheikh, a shopkeeper in Muksudpur, sells onions, garlic, spices, and some fresh produce.
He told bdnews24.com that while vegetable prices have declined recently, issues persist with spices and other goods sourced from outside the region.
“These products are not produced locally. We have to buy them from wholesalers who, in turn, procure them from border areas (as imported goods). Prices for these items remain high.”
When asked about specific prices, Noyon said: “Cauliflowers are now Tk 10 per kg. Radishes are Tk 5. Green chillies are Tk 50 per kg. The prices of these vegetables are lower because they’re grown locally in our union.
“Some items are not available in the union but can still be sourced within the Upazila, so there is no shortage, and prices remain low.”
He continued, “However, garlic is over Tk 200, cumin is Tk 600-700, and dried chillies cost Tk 500. Prices fall when imported goods arrive, but local products can’t cover the demand. There’s a shortage of these items, which is why the prices remain high.”
FISH PRICES SOAR
Jalil Matbar, a fish seller from the same area, said: “The prices of all fish are high. We can’t get them at lower rates ourselves. Even buying quality farmed fish now costs us around Tk 1,000.”
He added that fish from natural sources have seen a particularly sharp rise in prices.
“I used to sell koi fish for around Tk 600 to Tk 800, but now I’m selling them for Tk 1,000. The price of shing fish has also gone up, now ranging between Tk 1,000 to 1,200.”
Jalil believes that the floods in August 2024, which submerged ponds and caused fish to escape, may have contributed to the higher prices.
The price of rice in rural areas is somewhat lower than in Dhaka.
Golam Kibria from Cumillla’s Laksam told bdnews24.com, “I bought a 50 kg sack of BR-28 rice for Tk 3,000. The previous price was Tk 2,800.”
Last week, the same type of rice in a shop in Dhaka’s Mirpur was priced at Tk 3,150 for a 50 kg sack.
PRICES OF BAKERY ITEMS HIGHER
Md Suman, a bakery and confectionery shopkeeper from Muksudpur, said: “The prices of all products have risen over the past few months. The Tk 2-5 increase didn’t seem significant at first.”
His shop offers a variety of products, including cakes, biscuits, baby food, sweets, chanachur, chips, chocolates, fast food, and household essentials.
Some of these products have seen an increase in VAT under this year’s budget, which has driven prices up since then.
Midway through the fiscal year, VAT on certain items was raised again.
Suman said, “I’ve heard that VAT is increasing, but I haven’t received any updated supplies yet. For now, my shop still has the products at the previous prices. When the new stock arrives, prices may go up.”
The fruit market has also been expensive for quite some time. The additional import duties on foreign fruits such as apples, oranges, and dates have led to higher prices.
The rise in import duties on these fruits has further pushed up prices in rural markets.
WHAT DO GOVT FIGURES SAY?
The Bangladesh Bureau of Statistics, or BBS, provides data on inflation, detailing fluctuations in prices and their trends over time.
According to the agency’s data, rural areas saw food inflation, excluding food items, surpassing urban regions for most of the last nine months of the previous year.
In three of those months, food inflation in the country’s agriculture-driven rural areas also exceeded that of urban areas.
Data from these three months shows that in April, the rural food inflation stood at 10.25 percent, slightly above the urban rate of 10.19 percent.
In August, rural food inflation reached 11.44 percent, while the city rate was 11.24 percent.
By October, rural food inflation climbed to 12.75 percent, higher than the urban rate of 12.53 percent.
During these nine months, non-food inflation in rural areas followed a consistent upward trend, with the peak occurring in August, the month of political change.
That month saw the first instance of rural non-food inflation entering the double digits.
In that month, rural non-food inflation hit 10.45 percent. However, urban areas never saw non-food inflation reach double digits.
The highest recorded for cities was 9.71 percent in March, with inflation for non-food items in urban areas only surpassing 8 percent once, in June.
HOW INFLATION IS CALCULATED
As part of the $47 billion loan agreement with the International Monetary Fund, or IMF, the ousted Awami League government implemented several systematic changes.
Following IMF recommendations, a few changes were also made to the method of calculating inflation starting in 2023.
Since then, the fiscal year 2021-22 has been used as the base year for inflation calculations.
In addition, the number of goods and services taken into account for inflation has increased. Now, inflation is calculated based on 749 products across 383 categories, as opposed to the previous calculation which was based on 422 products.
Newly included items range from alcohol, cigarettes, beverages, and narcotics to expenses for children’s education, family internet costs, and dining out in restaurants and hotels.
The updated calculation also includes internet usage under the communications category.
Overall, the inflation calculation now covers food, non-alcoholic beverages, alcoholic beverages, tobacco, clothing, footwear, housing, water, electricity, gas and other fuels, household furnishings, household equipment and routine maintenance, health, transportation, communication, recreation and culture, education, and restaurant and hotel services, along with a variety of other goods and services.
Every month, the Consumer Price Index, or CPI, is calculated based on household expenditure on different goods and services.
The percentage increase in prices for these items and services is compared with the same period in the previous year, providing a point-to-point inflation rate.
Annual average inflation data is then generated by averaging the 12-month figures.
Though this method is internationally recognised, the prices of many products or services do not fluctuate easily.
As a result, the overall inflation figure does not fully capture the daily financial strain faced by the population when purchasing essential goods or services.
HOW PRICES ARE COLLECTED
The BBS collects price data from 154 key markets across the country.
This includes 90 markets in urban areas and 64 in rural districts, with each district providing one key market.
Within urban areas, 12 markets in Dhaka city, 4 in Chattogram city, 18 in other divisional cities, and 56 markets from different districts are included in the data collection.
For each market, three prices are gathered for every product and service.
In both rural and urban settings, 127 types of food items and 256 types of non-food items, totalling 507 varieties, are included in the price survey.
Price data is collected once a month from rural and urban markets, while in Dhaka and Chattogram city corporations, prices are collected on a weekly basis.
These data are typically obtained from specific shops in each market, while services are recorded from selected units or service providers.
To calculate the inflation index, the average price of each product is taken into account.
Separate inflation indices are created for food and non-food products, which are also calculated separately for rural and urban areas.
In addition, a combined overall inflation rate is presented based on the total data.
REAL PICTURE OF RURAL AREAS OFTEN REMAINS UNSEEN
The method used by the BBS for calculating inflation seldom captures the true picture of remote regions.
In addition, as the data is collected from designated shops, there is always a concern that the real situation may not be reflected accurately.
However, officials responsible for compiling the inflation index at BBS have a different perspective.
They justify their approach by referencing international protocols.
A senior official of the agency told bdnews24.com, “We are presenting the prices we find in the market. While there are many factors at the upazila and union level, we do not have the means to include them.
“The United Nations has a standard method for calculating inflation, and no one can deviate from it — and that includes us.”
Despite this, the IMF’s model includes numerous items, making it difficult to gauge inflation accurately.
Therefore, there are plans to create a separate list of items whose prices remain relatively stable.
The BBS official said, “Currently, there are many items. After consulting with economists and other experts, we plan to make a new list. This will include essential items whose prices remain relatively stable.”
Items like non-alcoholic beverages, alcoholic drinks, tobacco, housing, water, electricity, gas, and other fuels, household goods, and regular home maintenance products generally do not experience sudden price fluctuations.
Even when prices increase due to government actions or other reasons, they tend to remain fixed at those levels.
However, because of the inclusion of such items in the inflation index and the absence of price data from rural areas, inflation figures from these regions are often not reflected accurately.
In contrast, products like rice, lentils, edible oil, onions, chillies, and raw materials experience sharp price rises or falls when supply disruptions occur.
Along with this, there is the issue of price hikes through syndication and the creation of artificial shortages.
The planning ministry oversees the BBS, and its advisor has expressed doubts about the data collection and measurement process.
On Jan 8, during a briefing following the Executive Committee of the National Economic Council, or ECNEC, meeting, Planning Advisor Wahiduddin Mahmud voiced his concerns about the recently published BBS data, saying that he had to “publish it with his eyes closed”.
Although the adviser spoke about GDP, his concerns regarding the BBS were more general.
He expressed hopes for a shift in the situation with the new Statistics Act.
Wahiduddin said, “We are in the process of developing a new amended Statistics Act, and I hope we will be able to pass it. Under that law, the BBS will be able to publish figures related to growth, inflation, employment, and wages with the help of experts and within its capacity.”
WHY HIGHER IN RURAL AREAS?
Zahid Hussain, former lead economist at the World Bank’s Dhaka office, believes that one of the main reasons for higher inflation in rural areas could be the lower price level.
He told bdnews24.com, “Inflation and price levels are not the same thing. The prices of rice, lentils, and fish are lower in rural areas. When inflation occurs in such places, it shows a higher rate due to the lower base price.”
He illustrated this with an example: “Imagine a product costs Tk 50 in one place and Tk 100 in another. If the price increases by Tk 5 in both locations, the inflation rate in the lower-priced area would be 10 percent, while in the higher-priced area, it would be just 5 percent.”
In rural areas, where the price of agricultural products is already low, recent price hikes have contributed to the increased inflation rate, according to the economist.
In addition, products that are imported incur higher transport costs when reaching rural areas, leading to higher prices for food and non-food items in these regions.
He said, “The price at the Chattogram Port is different from the price when the goods reach Kushtia.
Prof Mustafizur Rahman, Distinguished Fellow of the Centre for Policy Dialogue, or CPD, points to the ongoing macroeconomic crisis as a major factor behind rising rural inflation.
“In an integrated economy, there is no longer a distinction between rural and urban areas. There is no reason why rural areas should not experience high inflation,” he told bdnews24.com
He explained that currency depreciation has increased import costs, while VAT on different products has also gone up. With higher interest rates, production costs have escalated as well.
“Business owners who have borrowed for investment are now facing higher repayment costs than expected. In this situation, they cannot increase production and supply,” he said
Prof Mustafizur continued, “We hoped that the government would take strong measures to ensure that the supply chain disruptions would be prevented and that the exploitation of middlemen would be stopped, but they have failed to do so.”
VAT RAISED MID-FISCAL YEAR
On Jan 9, the National Board of Revenue, or NBR, raised VAT, excise duty, and supplementary duty on over 100 goods and services, midway through the current fiscal year.
The list includes essential items such as medicines, restaurants, sweets, fruits, clothing, and tissues—products that are vital in daily life.
VAT on consumer goods was increased from 5 percent to 15 percent, while the VAT for businesses was raised from 5 percent to 7.5 percent.
Among the affected products are processed foods as well.
This move by the Muhammad Yunus-led government has drawn criticism from business leaders, politicians, and economists.
On 16 January, at a press conference held by the Bangladesh Agro Processors Association, or BAPA, Ahsan Khan Chowdhury, chairman of Pran-RFL Group, said: “The NBR demands VAT from companies, and this is added to the product price. When VAT is raised, the price of the products has to be increased, or the quantity reduced.”
POSSIBLE SOLUTIONS
Economist Zahid suggests that to better understand inflation trends, the government should calculate “core inflation”, as the large number of goods and services in the inflation basket makes it difficult to grasp the underlying nature of price rises.
That’s why the concept of core inflation exists globally.
“It excludes food and energy, which are susceptible to sudden external price fluctuations. Bangladesh Bank calculates this from the BBS data but does not publish it regularly.”
When asked how rural populations might cope with rising inflation and VAT increases, Zahid remarked that short-term solutions through policy changes are challenging. Merely using contractionary policies will not suffice.
“The market issues, such as extortion and supply shortages, need to be addressed. However, this will also be difficult in rural areas in the short term,” he added.
The economist recommends offering relief through budgetary support to ease the burden on rural people.
“In the short term, without additional social assistance programmes through the budget, people will not find relief. Their incomes are low, and rural incomes are not increasing.
“Thus, simply reducing inflation will not be enough; the price level must also be reduced. Without increasing employment and social assistance, the hardship will persist.”
He also suggested medium-term solutions, recommending that timely measures be taken to boost imports, production, and investment.
For short- and medium-term relief, he proposed initiatives like family cards for low-income households, an increase in TCB product distribution, and improvements in the environment for investment and production.