the effects of inflation on malaysia economy

7/23/2019 The Effects of Inflation on Malaysia Economy

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THE EFFECTS OF INFLATION ON MALAYSIA’S ECONOMY

Malaysia is a developing country that managed to score as South East Asia’s

3rd largest economy in year 2007 (HV !on"y # !hompson 20$%&' Malaysia as

admired "y many countries )or success)ully maintaining a lo and sta"le in)lation rate

that averaged at 3'$% percent )rom $*+% to 20$3 despite hitting an all time high at

$7'33 percent in $*7% re)ering to ,igure $'

,igure $- .n)lation rate in Malaysia )rom $*+$ to 20$3

Source- !he /orld an1

As noted "y Mconell rue and ,lynn in)lation is de)ined as the increase in the

aggregate level o) prices o) goods and services over a period o) time' /hen price

levels increase consumers’ purchasing poer erodes' !his translates to a decrease in

the real value o) the currency in hich one unit o) it ould no "uy the consumer

)eer goods than "e)ore (Mconell rue # ,lynn 20$$&' !he main measure o)

in)lation rate is the onsumer rice .nde4 (.& 5 the annual percentage change in the

general price inde4 over time' 6iven the satis)ying trac1 record o) in)lation in



Malaysia the statistics are to e4perience more )luctuations in year 20$% to the coming

year 20$ and 20$+' !his occurs mainly due to the changes in )uel su"sidies and the

plan to implement 6oods and Service ta4 (6S!& "y the government' Hence this paper

aims to discuss the e))ects o) the a)orementioned )actors on in)lation rate and the

a))ects that it ill have on the Malaysia’s economy'

6lo"al commodity prices have "een an important driver o) domestic in)lation

in Malaysia' !he trans)erred e))ects to in)lation are mainly controlled "y the

government’s administered price mechanism' .n 2008 the glo"al commodity prices

e4perienced a sharp increase re)ering to ,igure 2'

,igure 2- 6lo"al ommodity rices in 2008 and 20$$

Source- .nternational Monetary ,und (.M,&

!his is due to the increase o) more than to)olds in glo"al crude oil prices and the rise

"y more than 09 in glo"al )ood prices' oor harvest in March 2008 in the main rice5

e4porting countries resulted to supply shortages hich then caused the pressure on

prices' ,ortunately )or government control over certain domestic )ood and energy

prices the impact o) the dramatic increase in the prices on in)lation as delayed'



!he average in)lation rate as still under control at 2'*9 in the )irst )ive months o)

2008'

!he ne )uel su"sidy scheme is e4pected to ta1e e))ect on the third :uarter o)

20$ )or the purpose o) limiting the puchase o) su"sidised )uel )or certain consumer

groups' .ndividuals ith income "eteen ;M 000 to ;M $0000 are only entitled

up to 300 litres o) su"sidised ;<=* petrol per month (6ome> 20$%&' !he e))ects o)

the su"sidy roll"ac1 on in)lation ill not "e signi)icant as an estimate o) +09 o)

consumers ould still "e a"le to en?oy purchasing su"sidised )uel under the ne )uel

su"sidy scheme' According to .M ;esearch the in)lation rate is pro?ected to rise

up to %'0 percent in 20$ re)erring to ,igure 3' !he o))icials o) the .nternational

Monetary ,und (.M,& also support this notion'

,igure 3- E4pected in)lation rate given the ne )uel su"sidy scheme in 20$

Source- .M ;esearch

.n)lation rate is e4pected to e4ceed %'09 in 2@$ and 3@$ a)ter the

implementation o) the 6oods and Service !a4 (6S!& in April 20$ (umar 20$3&'

!he e))ect o) the 6S! on in)lation is presumed to "e largely one5o))' !his statement is

"ac1ed "y the similar patterns shon in consumer price indices presented "y

Singapore !hailand .ndonesia and etc' in ,igure %'



,igure %- onsumer price indices "e)ore and a)ter 6S! implementation

Source- .M, =ational Sources .M ;esearch

!herea)ter e e4pect the in)lation rate to moderate out in %@$' !he 6S! impact is

e4pected to dissipate "y early 20$+' !his claim is )ormed "ased on the previous hi1es

in administered prices in Malaysia that suggest a one5o)) increase ill not

continuously accelerate the prices as shon in ,igure '

Figure 5: Previous increase in administered prices had mainly one-off impact

Source: DOSM, CIMB Research



Works Cited

McConell, C., Brue, S., & Flynn, S. (2011). Macroeconomics (19thEdition ed.). McGraw!ill.

!", "., #on$y, %., & #ho'on, F. (201, May). *ndertandin+SE- Se/en thin+ you need to now. McKinsey & CompanyInsights and Publications .

Goe, . (201, une 3). 4utra5aya6 new 7uel u$idy chee $ad7or 'eo'le, ay critic. The Malaysian Insider .

8uar, 4. (201, :ece$er 1;). IMF: M’sian infation may touch 4in !"#$% <etrie/ed March 20, 2013, 7ro Free Malayia #odayhtt'==www.7reealayiatoday.co=cate+ory=$uine=201=12=1;=i7>E2>?0>99ianin@ationaytouchin2013=

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