By now, most of the rakyat are well aware (whether they are well informed or not is another question), it is plain obvious, inflation is looming over our heads. Can we blame the Global economic climate for it, or does it have to do more with our Governments inefficiency in managing the local economy (I strongly vouch for the latter although the so called politicians will beg to differ).
There are a differing school of thoughts on the ways to curb inflation. Bank Negara Malaysia can affect inflation to a significant extent through tools such setting interest rates and through other operations such as the Statutory Reserve Requirement (SRR), as I mentioned in my previous blog entry, both these steps are already being implemented. High interest rates and slow growth of the money supply are the traditional ways through which Bank Negara Malaysia fight or prevent inflation, though they have different approaches. For instance, some follow a symmetrical inflation target while others only control inflation when it rises above a target, whether express or implied. While the Monetarists emphasize keeping the growth rate of money steady, and using monetary policy to control inflation (increasing interest rates, slowing the rise in the money supply as what we are doing). Keynesians (another school of thought, emphasize reducing aggregate demand during economic expansions and increasing demand during recessions to keep inflation stable. Control of aggregate demand can be achieved using both monetary policy and fiscal policy (increased taxation or reduced government spending to reduce demand). Sounds too ‘ textbook’ type of explanation right?. Okay I will try to make it simpler.
Inflation can be caused by two different sources, from the supply side and demand side, the demand pull inflation is a result of strong consumer demand. When many individuals are trying to purchase the same good, the price will inevitably increase. When this happens across the entire economy for all goods, it is known as demand-pull inflation. On the other hand Cost-push inflation develops because the higher cost of production factors decreases in aggregate supply (the amount of total production) in the economy. Because there are fewer goods being produced (supply weakens) and demand for these goods remains consistent, the prices of finished goods increase (inflation).In Malaysia currently we are about to face the cost-push inflation, due to the inevitable rise in petrol, diesel, electricity tariff etc. Having said that what the BNM is doing is called the ‘tightening’ monetary policy.
Then again, this kind of policy will make the Government quite unpopular, and we have the General Election looming, would the Government make populist decision to satisfy the rakyat? But then again it will be nullifying or neutralizing the BNM’s move (Would the present Government bother? My guess is as good as your guess). Signs of these counter moves are already visible; recently the Human Resource Minister gave a strong worded statement that the Government is considering a minimum wage implementation, (don’t get me wrong, I am not against it, I am only against the timing of it, the could have implemented it quite a while ago), don’t you think it will further increase the cost of production and reduce the aggregate supply further and inflation would be worse?. …..Or are we heading towards a Perfect Storm?
Adios….a.h.Baharom
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