Causes of inflation in Malaysia

By | July 13, 2013

malay economic
Figure 1 Malaysia inflation rate increases

Source: tradingeconomics.com 2012

 

Historically, from 2005 until 2012, Malaysia Inflation Rate averaged 2.8 Percent reaching an all time high of 8.5 Percent in July of 2008 and a record low of -2.4 Percent in July of 2009. This chart above includes historical data for Malaysia Inflation Rate from 2018 to 2011 (tradingeconomics.com 2012). In the next section we will further discuss the causes of the current inflation in Malaysia.

 

1.1.1            High inflation in Asia

 

Since Malaysia has closed relationship with other international counterparts, in particular the Asian partners in term of trade and investment, the general inflation happening in Asia would also press the Malaysia economy to suffer from inflation as well. For examples, Inflation in South Korea, Asia’s fourth-biggest economy, hit 4.2 per cent in December 2011, unchanged from November and above the government’s 4 per cent target. And in case of Vietnam, which had Asia’s highest inflation rate in 2011 at 18 per cent, the Communist government appears to be once again favoring growth over inflation. In Indonesia, Asia’s third-most-populous country, falling inflation has freed up the central bank to continue cutting interest rates. Inflation fell in December, the fourth straight month of declines, to 3.8 per cent, the lowest level since early 2010 but it is still higher than Malaysia’s about 2 per cent inflation (ft.com 2012). And because of the general high inflation in the Asian countries, their products exported would also priced at a higher level and industries depending on these products as production materials would have to follow the higher material price and raise the good prices which increase the pressure for inflation increases.

 

1.1.2            Raised petrol prices

 

The government of Malaysia announced a revamp in its fuel subsidy system, raising petrol prices by 41% to MYR2.70/ liter and diesel by 63% to MYR2.58/liter effective June 5. Under huge political pressure, the government said that there will not be further hike in retail fuel prices in the same year but the price will be reviewed monthly. In other words, the price would be adjusted monthly based on the global oil price based on a formula: 30-sen per liter discount from market prices. Though the government will be giving out yearly cash rebate of MYR625 to owners of cars with a capacity below 2000 cc, its decision to raise the fuel price did contribute to the inflation in the economy (uobgroup.com 2011).

 

1.1.3            Economic Transformation Programme (ETP)

 

Malaysia in 2010 unveiled a bold initiative to transform the economy over the next decade, creating 3.3 million jobs and propelling the country towards developed-nation status. The ambitious agenda, aimed at ensuring Malaysia does not fall into the “middle-income trap”, would see gross national income grow six percent annually to hit 523 billion US dollars by 2020, up from 188 billion US dollars in 2009. The programme is to be powered by a targeted total investment of 444 billion US dollars embracing 133 projects, with 92 percent of the funding coming from the private sector (channelnewsasia.com 2010). With the ambitious economy plan in the coming decade after the release of the plan, inevitably there will be an increase of the aggregate demand in the economy which is contributed by both the increased government expenditure as well as the business firms’ demand through increased scale of investment in the coming years.

 

1.1.4            Increased monetary supply

 

Figure 2 The Money and quasi money (M2) in Malaysia

Source: tradingeconomics.com 2011

 

The Money and quasi money (M2) (current LCU) in Malaysia was last reported at 1064945222886.91 in 2010, the Money and quasi money (M2) (current LCU) in Malaysia was 992051869992.63 in 2009 and this number was at 920783860959.32 in 2008, according to the World Bank (tradingeconomics.com 2011).

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