INFLATION

The inflation rate in Malaysia was last reported at 3.3 percent in May of 2011. From 2005 until 2010, the average inflation rate in Malaysia was 2.77 percent reaching an historical high of 8.50 percent in July of 2008 and a record low of -2.40 percent in July of 2009.

What Does Inflation Mean?

The rate at which the general level of prices for goods and services is rising, and, subsequently, purchasing power is falling. Central banks attempt to stop severe inflation, along with severe deflation, in an attempt to keep the excessive growth of prices to a minimum. As inflation rises, every dollar will buy a smaller percentage of a good. For example, if the inflation rate is 2%, then a RM1 pack of gum will cost RM1.02 in a year. Most countries’ central banks will try to sustain an inflation rate of 2-3%.

 What Causes Inflation?

Economists do not always agree on what spurs inflation at any given time. However, certain forces clearly contribute to inflation. Rising commodity prices are perhaps the most visible inflationary force because when commodities rise in price, the costs of basic goods and services generally increase. Higher oil prices, in particular, can have the most pervasive impact on an economy. Higher oil prices mean first, that petrol prices will rise. This, in turn, means that the prices of all goods and services that are transported to their markets by truck or ship will also rise. At the same time, jet fuel prices go up, raising the prices of airline tickets and air transport; heating oil prices also rise, hurting both consumers and businesses.

 By causing price increases throughout an economy, rising oil prices take money out of the pockets of consumers and businesses. Economists therefore view oil price hikes as a “tax,” in effect, that can depress an already weak economy. Surges in oil prices were followed by recessions or stagflation–a period of inflation combined with low growth and high unemployment–in the 1970s, 1980s and early 1990s.

In addition to oil price hikes, exchange rate movements can presage inflation. As a country’s currency depreciates, it becomes more expensive to purchase imported goods, which puts upward pressure on prices overall.

 Over the long term, currencies of countries with higher inflation rates tend to depreciate relative to those with lower rates. Because inflation erodes the value of investment returns over time, investors may shift their money to markets with lower inflation rates.

Types of Inflation

 1.    Demand Pull Inflation

Under this situation the economy demands more goods and services than what is currently available in the market. The shortage in supply provides sellers an opportunity to raise prices until equilibrium is put in place between supply and demand.

 2.    Cost Push Theory

It is also referred to as “Supply Shock Inflation”. It means that shortages of goods or lack of supply of a certain good or product would affect the economy by raising prices all along the supply chain from the producer to the consumer.

 3.    Money Supply

The supply of money also plays a vital role in inflationary pressure. Monetarist economists state that if the money supply is not controlled adequately, it could grow at a rate faster than the potential output in the economy or real GDP. This in turn would drive up prices and result in inflation.

 Effects of Inflation

The value of the currency would go down as inflation goes higher. If the balance between supply and demand goes out of control, buyers would change their spending habits and suppliers of goods would suffer and would be forced to reduce output.

The daily life burden is higher nowadays because of the inflation. No more nasi lemak for  50 cents and minimum 2 RM1 nasi lemak needed to be full.

It is no surprise Bank Negara to increase the BLR rate. Those owing to banks will trap into the higher interest repayment burden. Businessman can ease their burden by increasing pricings to cover their higher financing cost while quality are not improved. Working under employment who have no increment will find life is more difficult. They may need to work extra to enjoy the same lifestyle.

Deflation

A decline in general price levels, often caused by a reduction in the supply of money or credit. Deflation can also be brought about by direct contractions in spending, either in the form of a reduction in government spending, personal spending or investment spending. Deflation has often had the side effect of increasing unemployment in an economy, since the process often leads to a lower level of demand in the economy.

 Causes of Deflation

  • Decrease in the money supply
  • Increase in the supply of goods
  • Fall in the demand for goods
  • Escalation in the demand for money 

Effects of Deflation

 1.    Over Production

When prices are falling, the producers buy material and other inputs at higher prices and are forced to sell the products at lower prices. It eventually results in over production of commodities.

 2.    Traders Lose

During deflation, the trader purchase goods at higher prices and had to sell later on at lower prices due to deflationary trends. They thus, lose in the bargain.

 3.    Investing Class

The equity holders lose during deflation and debentures holders gain when prices fall.

 4.    Fixed Income Groups

The pensioners, wage earners, gain during deflation as the wages, pensions etc do not decrease with fall in prices.

 How to cope with inflation?

  1. Save more, spend less.
  2. Go for value for money products.
  3. Request for pay rise.
  4. Work part-time or look for business ventures.
  5. Eat at home.

 

 

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