Price stability means the retention of the purchasing power of the national currency by maintaining low and stable rates of inflation over the medium-term (from 3 to 5 years) measured by the Consumer Price Index. Price stability does not literally mean unchanging prices; it means their moderate growth. In an economy where prices are considered stable, factors such as inflation and deflation have a minimal effect, and prices on goods and services change little from year to year. Generally, price stability is considered to be a good, though not necessarily totally achievable goal for an economy.
How it can be measured: Price Stability is measured by the
Consumer Price Index (CPI). Estimating CPI involves surveying people to
identify what they purchase on regular basis. This helps determine the basket
of commonly used goods and services. Total price of the basket is obtained from
market for current period and base period and following formula is used to
calculate CPI:
Consumer Price Index = Current Period Price of the Basket × 100
Base
Period Price of the Basket
In practice many
adjustments are made to CPI on account of seasonality, changes in composition
of the basket, etc. and different versions of CPI are calculated to cater to
real life needs.
In US, the Bureau of Labor Statistics estimates CPI on
regular basis. IMF and World Bank provide CPI and other data for majority of
countries.
The index is usually
computed monthly, or quarterly in some countries, as a weighted average of sub-
indices for different components of consumer expenditure, such as food,
housing, shoes, clothing, each of which is in turn a weighted average of
sub-sub- indices. At the most detailed level, the elementary aggregate level,
detailed weighting information is unavailable, so indices are computed using an
unweighted arithmetic or geometric mean of the prices of the sampled product offers.
Policy Can Exercise: The primary objective of the Bank is to achieve and maintain
price stability. Price stability does not necessarily imply that prices do not
ever change; rather it entails avoiding persistent increases (inflation) or
decreases (deflation) in the general price level. Therefore, the purchasing
power of the Bangladeshi taka and hence its credibility would be preserved.
Although the Governing
Council cannot influence price levels directly, it does have a means to control
inflation in a roundabout way: the interest rate. The BB’s primary interest
rate serves as the economy’s throttle and brake pedals.
A rate increase will push prices down, or at least rein in
rising prices. A rate cut will make prices go up faster. An increased interest
rate means that it will cost more to borrow money, and people will have less
money left to spend. As a result, the economy will slow down and so will price
increases. However, since it may take several months for a rate change to work
its way through into prices, the effect is not always clearly visible.