Macroeconomics: Inflation in Malaysia

Introduction

Inflation measures the average price level of goods and services increasing over a period of time in the economy. These are usually expressed in a form of percentage, when inflation occurs it indicates a decrease the nation’s purchasing power. This causes a price increase which impact the general cost of living for the common public and the central bank.

There are 3 different types of inflation.

Firstly, there’s deflation, this is where general prices are declining in goods and services and this occurs when inflation rate is decreasing and below 0%. This happens naturally in the system when money supply in the nation’s economy is fixed. When deflation is occurring the purchasing power of currency and wages in the country are higher than the average price level. (Deflation. (n.d.). Retrieved March 28, 2019).

Secondly, there’s hyperinflation, this is where price levels for goods and services have increased more than 50 percent a month. (Hyperinflation. (n.d.). Retrieved March 28, 2019) This usually goes out-of-control that the concept and use of inflation is meaningless. This is usually rare but it has occurred over 55 times in some countries in the 20th Century such as China, Germany, Russia, Hungary and Argentina. (Hyperinflation: Definition, Causes, Effects, Examples. (n.d.). Retrieved March 28, 2019)

Lastly, there’s stagflation, a combination of sluggish economic growth, high inflation and high unemployment. This is a very unnatural situation because usually inflation cannot take place in a weak economy. There will also be a decline in the nations GDP. (Stagflation. (n.d.). Retrieved March 28, 2019)

In this report, it will be discussing the trends in the graph of inflation in Malaysia, the cause of high inflation and what type of policy control measure they use to keep the inflation low as long as possible and how to fix their current situations.

Analysing the graph

[image: Malaysia Inflation Rate]

Malaysia’s Inflation Rate graph in the last 50 years

The graph shown above is the inflation rate of Malaysia for the past 50 years. Inflation rate in Malaysia has an average of 3.56 per cent over this past 50 years. The all-time highest percentage is 23.90 per cent during the year 1974 and the lowest inflation rate would be at a percentage of -2.40 per cent on the year 2009. As we can see from the graph, there was a drastic drop after 1974 and then there was another large increase in the inflation rate graph until it reached the peak during the year of 1983. The rate then became stable than it usually is until the peak drastic increase during the year 2008, this is because of the financial Asian crisis so the economy took policy measures to decrease the inflation almost immediately the next year of 2009. The inflation rate graph is almost identical with the business cycle GDP and inflation affect each other.

Causes of High Inflation

1970s and 1980s

[image: ]During the 1970s and 1980s there was a significant increase in the global energy and food prices because of disruptions in the supply. This was because of the Egypt-Israel War and the Iranian Revolution that was occurring in the 1973, global oil prices have rose drastically high. This shock caused a domestic retail fuel prices to increase by 9.3 per cent in 1974 and 7.3 per cent in 1981. The prices for global food increased drastically due to a shortage in food supplies globally. In the late 1960s, this caused an increase in the CPI basket up to 47 per cent. In response, there was an increase in domestic inflation of 17.3 per cent during the year 1974 and 9.7 per cent during 1981.

[image: ]Inflation through 1960-2008 with oil price CPI graph on food, rent and transport

Shock

1990s

This is the period where property demand was booming and there was a large capital inflow. The inflation during this period remained at a 3 per cent apart from 1997 and 1999 where the inflations were 3.8 per cent and 2.8 per cent respectively. Prices that were increasing were directly proportional with the demand and supply factors. Domestic demand is easily recovered as it follows a dynamic increase of income and employment growth. Results show that there was an extraordinary rise in prices of not only properties but also equity, this was encouraged by an expansion to national liquidity and large capital invasion, led to an increase in net wealth. The ringgit currency has depreciated by 28.3 per cent against the US dollar at the end of 1997 this is due to the cyclical shortage on necessary food items. The government rose the ceiling price of administered items such as cooking oil (5 per cent increase), chicken (5 per cent increase), flour (20 per cent increase) and milk (6 per cent increase) because the government had a high owing cost for importation.

2000s

During this period, this was a period where there were constant rising in global commodity prices.During the early 2000s, inflation was low as demand and supply pressures were characterised by the 1990s dissipated. However, it began rising in 2005 until I peaked at 8.5 per cent during 2008. The increase in inflation was controlled by external factors such as an immense global commodity and food prices. At the year of 1970s and 1980 there was a supply shock that caused a rising in global commodity prices and was underpinned by supply and demand factors. In the global commodity, there was a drastic increase in prices and a consequent strain on the government finances, this is because of a significant cost that result in a rise adjustment in prices on fuel. Fuel prices had increase at an average of 14.5 per cent while food inflation increased to 8.8 per cent at the year 2008(Determinants of Inflation in Malaysia. (n.d.).)

Policy control measures

2008

In this period, monetary policy took place and the Malaysian money market had operated a surplus liquidity environment. Malaysian banks have also lowered the cross-border credit exposures, smaller derivatives and foreign-currency dominated business. During the first half of the year it showed a steady growth of domestic liquidity. Total domestic liquidity as at 30 June 2008 was Rm 408 billion, which was RM 63 billion higher than end of December 2007.

Liquidity and exchange rate trends had reversed in the second half of the year. Although liquidity conditions remain broad, the surplus liquidity in the domestic money market had began to moderate due to the portfolio outflows. This was driven by weakening global economic conditions and the deleveraging by foreign financial institutions.

Throughout the year, the Bank’s money market has being continuing operations to maintain liquidity conditions that ensured the overnight interbank interest rate traded within 25 basis point corridor around the OPR.

Interbank participants remain as net lenders in the interbank money market throughout this period. This is because the Bank’s standing facility had only been utilised around 14 times through out of which only two had been providing funds to facilitate short-term transitory liquidity shortage and this was solely due to operational factors. The types of monetary instruments during the whole of 2008, direct borrows and Wadiah acceptances continued to happen as the primary instruments, accounting for 62 per cent of surplus liquidity were sterilised.

In addition, on 5 November 2008, pre-emptive measures are a part of it to maintain a stability in the financial system. The Bank had liquidity facility available to insure companies are regulated and supervised by the Bank. (Monetary Policy in 2008. (n.d.).)

Conclusion

Overall, it may be said that through all these high inflation crises that have occurred, Malaysia’s economic has always used monetary policies to keep their inflation rate as low as possible. Monetary policies help the inflation rate go down as it helps manage the money supply as shown in 2008 policy control measure.

Reference

1. No Title. (n.d.). Retrieved from https://www.investopedia.com/terms/i/inflation.asp
2. Hyperinflation: Definition, Causes, Effects, Examples. (n.d.). Retrieved March 28, 2019, from https://www.thebalance.com/what-is-hyperinflation-definition-causes-and-examples-3306097
3. Deflation. (n.d.). Retrieved March 28, 2019, from https://www.investopedia.com/terms/d/deflation.asp
4. Inflation Definition. (n.d.). Retrieved March 28, 2019, from https://www.investopedia.com/terms/i/inflation.asp
5. Malaysia Inflation Rate | 2019 | Data | Chart | Calendar | Forecast | News. (n.d.). Retrieved March 28, 2019, from https://tradingeconomics.com/malaysia/inflation-cpi
6. Stagflation. (n.d.). Retrieved March 28, 2019, from https://www.investopedia.com/terms/s/stagflation.asp
7. Hyperinflation. (n.d.). Retrieved March 28, 2019, from https://www.investopedia.com/terms/h/hyperinflation.asp
8. Determinants of Inflation in Malaysia. (n.d.). Retrieved from http://www.bnm.gov.my/files/publication/ar/en/2010/cp01_003_whitebox.pdf
9. Monetary Policy in 2009. (n.d.). Retrieved from http://www.bnm.gov.my/files/publication/ar/en/2009/cp03.pdf