The current inflation situation in Malaysia

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.

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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.