Malaysia current inflation situation

Introduction

Inflation is the controversy issue in world economic development. It causes

many others problem to the country all to the world. It because the inflation itself is

not only burden to that country, but it also spread the effect to the related country that

has relation with them. Not even one single country can avoid the inflation can

happen. It always happens but the increasing of inflation can cause others problem

worsens.

It is the phenomenon that has features of world wide. It affected that not

conclude only to certain country. It always happens to most country in the world.

Inflation also spread from the host to others, start from the primary country such as

USA if they experience the inflation, then other country also experience it in the

various degree of stages.

When the inflation happens, it involved each part of the community. House

hold, workers, investor, and even pensioner affected by the inflation. But the effect is

also various, certain people get the benefit from it and the others get the losses. It

depend on how the money use to us, either it been use to pay debt or to pay goods we

buy.

Recently, the world has experience the inflation once again that affected most

of the country in the world. It caused by the increasing in price of world crude oil as a

main reason. In Malaysia for example, the inflation rate has reach up to 8.5 percent on
July 2008. The inflation in Malaysia also happens due to the increase of the

government servant salary that increases the power purchase of the most population in

the country.

When aggregate demand increase, many sellers and firms take advantages by

increase price to gain more profit. The increment is roping from one good to another

that suddenly cause the reducing value of money itself.

Compare to the previous years, the July 8.5 % rate is the highest in 26 years.

High rate of inflation has brought the country to many problems such as lost

investment, economic recession, slow down economic growth and most important is

dropping the value of ringgit.

Based on the serious increment, the government has come out with several

instrument and measurement to face the inflation. The inflation instrument such as

monetary policies, fiscal policies and also the physical control is the application use to

control the inflation that occurs. All the instrument use also has negative effect if it

been applying for a long term.

Definition

The term Inflation can be define as the increase average price of good sustain

for a period, in easier word, the increase price of good. The price will sustain

increasing for a period of time. It is different from the increasing of good several

times in several month or once in the several month either also the sometimes in a

year. For example the increase price of good when festive season can be called as

inflation because it only happen twice a year and not sustain.

The overall increment of price happen when as in average the price in the

economy increase. So, at the time of inflation occur, there is a price that increase high,

slowly and also doesn’t change at all. Moreover, there is good that decrease the price.

The measurement in the inflation is based on the sustain increases in average price of

total good. If the average price of total good decrease, it is not called as inflation, but

it’s known as deflation.

The inflation is measure on the percentage rate. But the normal rate of the

inflation is different from various countries. In Malaysia, the normal rate of inflation

is below 5% per year or per count. Before 1960, normal rate of Malaysia inflation is 2

% a year. After the big wave of inflation that occur on 19970 to 19974, the rate has

increase to 5% a year as normal rate, because in that period, 10 percent of inflation is

a normally rated by many country in the world. The main cause of the occurred

inflation is because the increasing of crude oil by the OPEC by 400 percent, known as

the demand shock.

The main reason of inflation occur in Malaysia

The reason behind the inflation is due to several current factors happen to the

world. It also been causing by the internal factor that help worsens the situation. The

first factor is because the increase of crude oil price. It infect country gas price to

increase too because government cannot stand the subsidies increase. Current price of

crude oil has increase to USD 150 a barrel, that cause Malaysia to face 7.7 percent

inflation on June and increase again on July to 8.5 percent. The increment of the

natural resource price has increase the price of local gas to rm 2.7 per liter than before

from rm 1.92. It’s been followed by the increase of the local goods such as cooking

oil, flour, and rice and other in that year. The local trader has taking the advantages to

increase the prices of good due to the reason of oil price increase.

The value of ringgit has turn down and lowering its value because of the local

traders act. By increase the price of good, the value that previously can buy good in

certain quantity, has goes down that only by the same good but in the less quantity

than before.

For example, the price of 1 kg of rice in 2006 is rm 2.00. Say the price of the

same good has increase to rm 2.50 on January 2007. it mean that the price of the same

good has increase 25 percent than the previous year. The act of the local trader has

reduced the value of the rm by 25 percent than the previous year. So, the inflation has

cut down the purchasing power to the households.

It also caused by shock demand due to economist speculation. The news of

future price would increase tend to make people to buy good in large quantity that

makes certain good gone out of the demand than usually. To reduce the demand, local
retail hide the stock and increase the price of good that make the inflation rate

increase.

The inflation in Malaysia also occurs because of the increment of salary and

wages and also new COLA announcement by the government. The pronounced not

only enjoying public servant but also the local trader too. After a few day of the

announcement, various type of necessary good increase. It is done by the local retailer

and shop owner to gain profit from the situation. The inappropriate act by the local

trader gives the kick start to Malaysia inflation to grow. Later, the government has

come out with many type of control to decrease the price of good but the trader has

worsen it better by hiding the good to increase the price back.

From That reasons above, clearly we can see the main cause of Malaysia

inflation is done by the inner problem itself. The act of local retail and traders is the

biggest contributor to the inflation. Although many people can see the general effect

of the increase of crude oil causing the inflation rate increase, but the government has

absorb the burden by giving the subsidies to many necessary good to reduce the cost.

It cannot be the best reason to local trader to increase price of good in the market that

tend to increase the inflation.

Government action to face the inflation

Government applies the various strategies to face the inflation that barge in

Malaysia recently. Bank Negara Malaysia as a central bank act as government agent

controls the economic by implementing several policies to the commercial bank and

the financial institutions. They also give many advices to public on how to help

government to control the inflation.

Monetary policies

There are 3 measurement use by BNM to control the inflation in the first way

the BNM use to control the inflation is by using the monetary policy. Monetary

policies is a policy use to manipulate to money supply for maintaining the stability the

in the market. Instruments use in monetary policies such as open market operation,

statutory reserve requirement, discount rate and also moral suasion.

First is open market operation. Open market operation is the instrument that

act to reduce or adding commercial bank money supply by selling or buying

securities. The BNM can force commercial bank and financial institution to buy the

securities that can reduce their money supply and then reduce the capability to give

loan. Reducing loan giving means reduce the flowing of money in the market.

Next is the use of statutory reserve ratio. It is the instruments that increase the

reserve of the commercial bank. BNM control the inflation by increase the reserve

ratio to reduce the capability to give credit to customer. By doing so, it also reduce the

money supply in the market and tend to reduce the purchasing power of the

costumers.
 Next is the using the discount rate. Bnm will influence the discount rate on

loans and interest charge on the reserve to commercial bank. If the inflation goes up,

BNM will increase the discount rate charge to discourage the bankers from making

loan and borrowing reserve and then reduce the flow of money in the country.

Moral suasion is the involvement of BNM in bank policies and activities.

They tend to give order and direction on how to control the inflation to the

commercial and financial institution

Fiscal Policies

This policy dealt with government expenditures and taxes. When the inflation

occurs, government will use surplus budget policies by increase the taxes and reduce

government spending. This implementation will lead to lower income to public and

reduce the purchasing power. Government has introduce the prudent spending

program due to this inflation time by minimizing the cost of operation of government

and lead the government to spend more wisely. Government also has stop the on

going development that increase spending to reduce the outflow of ringgit to the

market.

Direct or physical control

Government has implements direct or physical control to face the inflation. The first

physical control use is anti hoarding campaign. KDPNHEP has forced out their

officer to take action for those retailer and trader that hoarding the goods on inflation,

those who hiding goods will be compound and goods will be snatch. For example

when the deficiency of cooking oil, KDPNHEP has working out to check from
premise to premise to avoid the trader from hoarding the stock. The purpose of stock

hoarding is to rising price of the goods. From the campaign, government has

introduced the new price of cooking oil to stop the increment of the price.

Conclusion

Government has come out with many measurements to fight back the inflation that

occur our country. Some of them looks done and some else don’t make any reaction.

For example the increasing rate of bank interest giving hope to reduce loan from

customer but the behavior of some traders that hoarding the stock, worsens the

situation.

To face the situation in more efficient way, government should make an adjustment

on its policy to face inflation. Government should start to encourage public to buy

local good and also makes good to buy. Mean that, people should start to join in

agriculture that can produce necessary good that can be put in market. Making our

own food can reduce the depended on import on food. It reduces the money supply.

Moreover, local goods are cheaper than imported product.

Local traders also need to be more competitive. They cannot simply increase the price

to gain more profit but they need to find new way to solve their problem. The

Malaysia is not done by the increase of oil price but the attitude of the traders itself.

Self awareness is the most important thing to be developed in our society today to

prevent this act to be inherited to next generation that can make 1998 situation

happens again.
References

Commercial Banking In The Present Of Inflation, A.L.M Abdul Gafoor, 2000, Kuala

Lumpur.

Teori- Teori Inflasi, Yap Chan Ling, Penerbitan Fajar Bakti Sdn Bhd, 1979, Selangor.

Monetary Policies And Rational Expectation, George Macesich, 1987, Prager

Publisher, London.

Inflasi, Mansor Jusoh, Dewan Bahasa Dan Pustaka, 1990.

Macroeconomics, Rosfadzimi Mat Saad, Jamilah Mohd Mahyideen, Irwani Hazlina

Abd Samad, Nor Azizah Mohammad Amin,, Rahimah H.P. Shawakataly, Zainab

Alias, Fifth Print 2007, Pearson Prentice Hall.

Web search

http://www.pbs.org/wgbh/commandingheights/lo/countries/my/inflation.html

http://indexmundi.com//inflation_rate_(consumer_prices).html

http://economicsandpolitics.blogspot.com/2008/02/inflation-or-recession.html

http://www.post1.org/wiki/Malaysia_inflation_watch
DIPLOMA IN PUBLIC ADMINISTRATION
AM110

Macroeconomics
Eco 211

Current situation of Malaysia inflation and

the way government face the problem

PREPARED BY:

IDRIS BIN AHAD

2007224196

PREPARED FOR:

Puan Rosfadzimi bte Mad Saad

DATE OF SUBMISSION

20-october-2008