Thursday 10 February 2022

Inflation: Is it a Monetary Phenomenon? (Part 2)

This is the second part of an article on inflation (Part 1 was posted on 9 Feb 2022).

In 2021, inflation (sustained increase in general price level of goods and services) rose by 2.5% according to the Department of Statistics Malaysia. The consumer price index (CPI), which measures changes in prices of consumer goods and services, is used to gauge the level of inflation. The CPI typically calculates the cost of a ‘basket’ of goods and services purchased by consumers. As can be seen in Table below, the main components of Malaysia’s CPI comprise food and non-alcoholic beverages, housing and utilities, transportation and other items.



However, for a consumer, depending on his or her consumption pattern, the actual rate of inflation that he or she experiences may be different from the official inflation rate as measured by the CPI. For example, as prices of groceries and dining-out expenses have been rising at a faster pace than the headline inflation rate over the years, an individual who dines out more often would find these meals more expensive due to the higher inflation, compared to others who rarely dine out.

For December alone, it (inflation) was 3.2%. Prices of chicken and eggs rose by 13.6% and 13.5% respectively. Meat rose by 8.3%, vegetables by 5% and fish and seafood by 4.2%.




The impact is severe for households earning below RM3,000 per month. Inflation by states also varied with highest for Terengganu (3.9%) and lowest for Sabah/Labuan (2.0%).



The above is compounded further by TNB’s “master stroke” of increasing tariffs in February 2022 on commercial and industrial sectors. That will effect through the economy in the coming months.

Meanwhile, what can the Government do? On monetary policy, BNM could act by raising Overnight Policy Rate (OPR) from 1.75% to 2% (or above) in March which may dampen demand, while businesses try to re-configure margins and costs.

On the supply side, it is to relook at food items that could be produced locally instead of being imported from Thailand (or other places). This will reduce risk of imported inflation. In 2020, Malaysia imported around RM55.5 billion in food items. And these items suffered from price hikes. In addition, the ringgit has depreciated from 3.27 in 2014 to 4.25 in 2020.

For January 2022, the Malaysian ringgit slid below other major currencies and will continue to do so unless capital outflows are mitigated, and the yields advantage is maintained with the U.S. dollar. Otherwise, we may see the ringgit hovering at 4.30 (or more) against the greenback with imported inflation rising further.

So, is inflation purely a monetary phenomenon? No, although monetarists like to think so. Modern Monetary Theory (MMT) flies against accepted wisdom – i.e. that printing money has no consequences since it is not backed by gold and is purely fiat. Can you believe this?

In summary, inflation in an economy can be grouped under:

(i) Demand-pull
This includes surge in money supply –“too much money chasing too few goods”

(ii) Cost-push
Increase in cost of production, i.e. input items including oil price rise.

(iii) Imported
Weaker exchange rate increases cost of imported goods, especially food items.


(iv) Structures
Cartels, monopolies, middlemen who may manipulate prices for their own benefit.

Can’t Governments do anything? Yes, they can set monetary policy, fiscal policy, moral suasion (jawboning) and market intervention to ease-up inflationary pressures. What specific tools to use? Well, that’s for another time!

References:

Inflation: merely a monetary phenomenon? Ariadna Vidal Martinez, Macroeconomics Unit, Strategic Planning and Research Department, CaixaBank

Statistics Dept: floods caused higher food prices, Malaysiakini, Jan 21, 2022

Understanding the factors that impact inflation (https://www. publicmutual.com.my)

Depreciation ringgit, role of middlemen likely reason for price hikes, accelerated inflation, say economists (https://malaysianow.net)

Prices aren’t going up, the ringgit is going down, K. Kathirgugan, FreeMalaysiaToday, January 20, 2022

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