Inflation rate refers to the general level of prices for goods and services is rising subsequently, and influences the purchasing power is falling. The most well-known measurement of inflation in the whole of the domestic economy which are the Consumer Price Index (CPI) which measures consumer prices, and the Gross Domestic Product (GDP) deflator.
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The prices on average are keep rising rapidly means a high level of inflation rate while the prices on average are rising slowly means that a low level of inflation rate. The prices remain essentially the same, month after month which means that the inflation rate is zero. In other words, a high inflation rate has decreased the purchasing power of people and caused them to buy less as prices keep increasing.
Since Malaysia independence, the Malaysian economy has perceived the rapid of the evolution from being agriculture based to manufacturing-driven and then to being the service-based. The proportion of expenditure on food and beverages has decreased and in order also increase the expenditures on housing, transport and communication. As the results, the economy becomes advanced and average income increased.
The controlling of the price mechanism is a key feature that affects the transmission of inflation in Malaysia. The prices of some essential goods are governed by the Government as changes in the prices of these goods will have a significant impact on the cost of living in the low and middle-income group.
The first group that Government determines the retail prices of those consumer goods are fuel and sugar. Furthermore, electricity tariff and public transport fares are the second group that required Government approval for changes to be made on their prices. With the controlling price mechanism in place, the impact of supply shocks and external price developments in domestic prices is less direct.
Figure : Inflation rate of Malaysia (1999-2011)
(Sources: www.indexmundi.com)2.0 DATAinflation rate.jpg
Inflation Rate, Average Consumer price (%)
Table : Inflation rate of Malaysia (1999-2011)
3.1 ANALYSIS YEAR 2007
It shows the achievement of an environment of relatively low inflation that indicate the strong economic performance. The headline inflation rate measured by using the Consumer Price Index (CPI) that show the slower pace of increasing by 2% in 2007 (2006: 3.6%). The level of inflation was within the forecast range of 2-2.5%. Rising global prices of primary and food commodities generate a serious challenge to policymakers globally in 2007. These developments affected price inflation across the globe entirely.
In addition, important causes of inflation are supply-side or cost-push factors that have shown by their short and long term contribution to the Consumer Price Index (CPI) inflation. Research shows that a 1% rise in the Producer Price Index (PPI) is associated with a 0.39% rise in CPI inflation in the long run while a 1% increase in nominal wages raises CPI by 0.32%.
Furthermore, the increasing of the price of the food and non-alcoholic beverage category were the main contributors accounting for 47.1% of the headline inflation rate compared to 29.7% in the previous year. Domestic food prices were largely affected by higher world prices for food commodities, including household essentials such as rice, wheat flour and palm oil-based cooking oil. Structural and cyclical are the factors that established the higher global food prices. As a result, the contribution of food prices to headline inflation was higher than in the previous year.
Moreover, a higher of the inflation rate are governed by the restaurants and hotels; and recreational services and culture categories since the prices of hotel accommodation and tour packages rose due to higher demand following the very high number of tourist arrivals in response to the Visit Malaysia Year 2007 campaign (2007: 21.0 million, 2006: 17.5 million). In the previous years, the increasing of inflation rate was decreased by the decline in the prices of items in the communication, and clothing and footwear categories.
3.2 ANALYSIS YEAR 2008
In the first five months of 2008, headline inflation increased following by the steady rose in global food and fuel prices that extraordinary new highs at mid-year. In July, the climax of headline inflation is 8.5%. The headline inflation averaged at 5.4% for the whole year. The large current account surplus had made the external position remained strong in the first half of 2008. The current account was endorsed by a huge trade surplus following the stronger growth in both commodities and resource-based manufacturing exports.
However, there has been a net deficit in the overall balance of payments position in the second half of 2008 since the outflows in the financial account more than counterbalance the surplus in the current account. The large reversal of portfolio investment by foreign financial institutions contributed to the net outflow in the financial account.
In the first five months of the year, global food and fuel prices increase steadily due to supply-related factors and influence the headline inflation had continued its modest uptrend. In addition, the food and non-alcoholic beverages and transport categories which together consists of 79.7% of the overall increase in domestic prices are the main factors for inflation in 2008. In 2008, inflation in the food and non-alcoholic beverage category averaged 8.8% (2007: 3.0%), and contributed 52.2% to overall inflation in 2008. Nevertheless, the higher global food prices, especially grain prices will raise the domestic food inflation. On average, the domestic price of rice rose by 25.3% in 2008.
The increasing price of domestic food started in August 2007 and rose to a peak of 12.3% in September 2008. However, the inflation trend for food-prices are moderate. In 2008, inflation in the transport category has averaged 8.8% (2007: 2.3%), and contributed 25.9% to domestic inflation. Domestic retail fuel prices remained static due to Government subsidies and influence the inflation in the transport category remained relatively modest in the first half of the year.
Another significant factor affecting headline inflation was the rise in electricity tariffs by 19.4% in July 2008 and the imposition of a 20% rise in excise duties on cigarettes in August. Subsequently, prices in the housing, water, electricity, gas and other fuels category increased at a faster rate of 1.6% in 2008 (2007: 1.3%).
Besides, the alcoholic beverages and tobacco category still registered at a lower inflation rate of 7.3% in 2008 compared to 7.8% in 2007 due to the increase in excise taxes on cigarettes. The decline in prices in the communication and clothing and footwear categories were partly diminished the increasing of the overall prices. Since 2005, prices in the communication category have been decreasing, while prices in the clothing and footwear category have been declining since 1999.
The inflation in the local component of the PPI had risen to 10.3% in 2008 compared to just 7.6% in 2007. This was primarily due to price increases in the mineral, fuels, lubricants and related materials, chemicals and related products not elsewhere specified and manufactured goods classified chiefly by materials categories.
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Meanwhile, inflation in the imported component of the PPI moderated to 4.2% (2007: 4.8%). The inflation is moderate is because of the smaller share of commodities in the imported component of the PPI that is only 7.2% compared with 26.8% in the local component of the PPI.
3.3 ANALYSIS YEAR 2009
In the early part of the year, it shows the weak global demand condition due to a condense credit conditions as rising unemployment and degenerate consumer and business confidence, households and businesses controlled their spending activities. In conclusion, many countries experienced lower inflationary pressures in 2009. Hence, a steep decline inflation is recorded in the advanced economies.
The lower domestic inflation was contributed by the decline in global fuel and commodity prices and the deflationary conditions of Malaysia’s top trading partners. Subsequently, the devaluation in the retail petrol prices in the second half of 2008 contributed to the moderating trend of domestic inflation. The effect was significant in July 2009, as the transport category drop to 19.9% which contributed to a 3.2% fall in inflation.
The impact on headline inflation was tremendous that influence the annual rate of price level falling by -2.4% in July that is the lowest rate since August 1986. The CPI for food and non-alcoholic beverages also moderated to an average of 4.1% during the year (2008: 8.8%). After that, the CPI sub-category for rice, bread and other cereals had the negative region in June 2009 and fall in global grain prices from the latter part of 2008.
Meanwhile, prices for other CPI categories remained relatively stable, with an average increase of 1.5% in 2009 (2008: 2.3%). The imposition of an additional excise duty of 1 cent per cigarette in October that make the CPI higher for the alcoholic beverages and tobacco category is the factor that induces the headline inflation.
3.4 ANALYISIS YEAR 2010
The headline inflation is measured by using the Consumer Price Index (CPI) that shows that the averaged is 1.7% in 2010. (2009: 0.6%). The emerging of supply factors from higher food and commodity prices and adjustments to administered prices increasing the inflation rate. However, due to the Government’s subsidy rationalization programmed, the actual headline inflation was below the Bank’s forecast range of 2.0 – 2.5%.
Nevertheless, the increasing in domestic prices of food and non-alcoholic beverages and transport categories which together consists of 59.2% of the overall were the main contributors to inflation in 2010. The inflation in the food and non-alcoholic beverage category (2.4%) is due to the higher increasing price in the vegetables, meat, sugar, confectionery sub-categories and so on.
Anyhow, inflation in the transport category showed a substantial turnaround from a negative value to a positive value that is 1.6% in 2010. (2009: -9.4%) This situation happened is because of the imposing higher fuel prices. In addition, the increasing in inflation was lessened by the declines in the prices for the clothing and footwear and communication categories, which averaged -1.4% and -0.2% respectively (2009: -0.9% and -0.5% respectively).
Apart from that, the alteration of the retail prices of RON95 petrol, diesel, LPG and sugar contributed almost 0.18% to headline inflation in 2010. In 2010, the increasing of the price of RON97 petrol and kerosene were the significant adjustments in retail prices. In July of 2010, the Government makes a proclamation that the price of RON97 petrol was to be regulated by global market forces under a managed float mechanism. In the conclusion, the price of RON97 petrol increased by a total of 25 cent/litre in 2010.
Besides, Malaysia’s imports also contributed to the higher domestic inflation during the year. Higher food and energy prices and stronger-than-expected recovery in domestic demand had made the import partners experienced the higher inflation. The upward price pressures from the emerging economies were equilibrated by more muted inflationary pressures from the advanced economies. Most advanced economies experienced moderate demand conditions, slack capacity, sustained high unemployment and weak consumer.
3.5 ANALYSIS YEAR 2011
Inflationary pressures increased in both the advanced and emerging economies supported by higher food and energy prices and this upward trend was reflected in core inflation. However, the upward momentum of price increases slowed in the latter part of the year have improved the inflation rate begin to sustain and also slower the increasing speed of commodity prices.
Demand pressures were stronger in 2011 that’s been proven by the strong domestic demand reinforced the cost-push inflation. Furthermore, the positive labor market conditions and continuously increasing in wages had shown that the private consumption increased in 2011.
Moreover, firms were acceded about the increase in costs from high commodity prices by adjusting retail prices due to the strong demand conditions. Consequently, core inflation rose with more prevalent increases in inflation across the CPI components. The inflation rate of the CPI sub-categories increased from 35% in January to 49.6% in September. The food and non-alcoholic beverage category which is 65% of food components shown the increasing price in mass and as the result the inflation more than 2% in the first nine months of 2011 (2010: 43%).
At the end of the year, there was an extension of increasing with inflation had been comprised. Besides, the inflation rate of the percentage of CPI sub-categories have been stabilized since October 2011. In addition, pressures on inflation have constrained by the subsidize supply pressures and uncertainties increased over growth prospects in the fourth quarter of the year.
The higher inflation of 24.2% and 23.2% in the mineral fuels, lubricants, crude materials, inedible sub-categories are due to the rose of global commodity price. (2010: 12.8% and 22.4%). The non-commodity increased at a moderate speed of 2.1% in 2011 (2010: 1.6%). Besides, components of the PPI no matter in local and imported have shown a higher inflation. The annual growth of the PPI for local components rose to 12.0% (2010: 7.7%) while the imported components increased by 2.3% on an annual basis (2010: 1.4%).
Based on the experiences of 2007 and 2011, it can be concluded that the different magnitude of global commodity price increases had a differing impact on the propagation of these shocks to domestic inflation. With the administered price mechanism in place, the propagation of these global price increases to domestic inflation were, in most cases, delayed and incomplete. The pace of adjustments in administering prices in response to global commodity price increases were a key determinant of the strength of inflationary pressures that were transmitted through the first-round effects. The first-round effects would be better contained if adjustments to administered prices were undertaken in a gradual manner, as businesses would be better able to manage the impact on their costs. This, in turn, would result in a more gradual increase in inflation and the cost of living and reduce the risk of second-round effects occurring. In the early 2000s, inflation moderated to very low levels as the demand and supply pressures that characterized the 1990s dissipated. Inflation in Malaysia, however, began rising in 2005, reaching a peak of 8.5% in July 2008. The higher inflation during this period was driven mainly by external factors, in particular, due to higher global commodity and food prices. In contrast to the supply shocks of the 1970s and 1980s, the increase in global commodity prices was underpinned by both supply and demand factors