Malaysia: Is Inflation Inching Up?

 

Many economists expect inflation to rise in 2021. What are the Government’s options? And what has been the official rate for the last 4 years?

Year	Rate (%)
2020	-1.13
2019	0.66
2018	0.97
2017	3.8

Source: www.statista.com

For 2021, the expectation is a rise of 2.42% (some say it may go higher to 3% p.a.). About 20 million Malaysians will get ready to celebrate Hari Raya Aidilfitri by 13th May, and concerns arise of cost of necessities. The economy is still fragile – drifting between CMCO and MCO, unemployment is still on the rise and others are having to suffer pay cuts or a “freeze”.

In March 2021, the headline rate increased to 1.7%. Why? Petrol and diesel prices were higher than a year ago. Then the weak ringgit has made imported products – food and intermediate goods-- more expensive. And if consumer demand recovers, which is unlikely, then that may add further fuel to the small fire.

The Government is subsidising fuel prices, extended sales tax exemption for cars and electricity bill discounts to June 2021. Is that enough?

Price control enforcement, targeted cash transfers to the B40 group and a higher exchange rate policy will reduce cost of imports and mute any nascent advance of inflation. Keeping it below 3% will reduce the burden of the most vulnerable low-income group. The other is to improve savings deposit rate to above 3.5% p.a. for a fair return to savers. It then suggests OPR to move up from 1.75% currently. Inflation currently is a “cost-push” development than a monetary phenomenon. Nevertheless, a higher OPR will improve exchange rate and reduce effects of any imported inflation.

When inflation is too high it will reduce the value of money unless interest rates are higher than inflation. It is the real return that savers look for unless the Government is deliberate in its actions to “move” people from savings to investments! The key effects of inflation could be described as:

−         Erodes purchasing power – not too surprisingly some in the public sector are oblivious to this idea and look at nominal value rather than present value of a stream of projected cashflow for a project. Price of nasi lemak today and 10 or 20 years ago is significantly different;

−         Encourages spending, investing – a predictable response to declining purchasing power is to buy now rather than later. If cash is to lose value, then shopping is better now than later.

Businesses may do capital investments now than later, since costs may look more manageable today than later.

−         Continued rise in inflation – with the urge to spend because of inflation, it tends to boost more inflation – a disastrous feedback loop.

−         Raises cost of borrowing – central banks’ may damper rising inflation with higher interest rates. That raises cost of doing business.

−         Unemployment may fall – as the Phillips curve suggests there is an inverse relationship between unemployment and inflation.

For Malaysia, inflation is not on a “runaway” trend right now, but savers and lower income groups are impacted by sustained increase in price. The Government must keep a close watch on price movements and devise targeted measures to mitigate any adverse development.

Reference:

Ganeshwaran Kana, Inflation Inching Up, 27 April 2021, StarBiz