Inflation – The Real Picture
By Masterwordsmith
In an interview with journalists in London on Wednesday, Najib said that the central bank would monitor the situation “very very closely”. Some investors were surprised that Bank Negara did not raise rates at a policy meeting last week and surmised that such moves may cause Malaysia to slip in the battle against inflation.
Speaking to the reporters, Najib said, “We believe [the official interest rate] is at the right level. It’s a balance between strong growth and at the same time keeping inflation in check and making sure we don’t get an asset bubble economy in Malaysia.
He said, ” Malaysia had been “quite successful” in keeping inflation at an annual rate of 2-2.5 per cent until recently. Even though it is creeping up to about 3 per cent but I think in terms of the global scale it’s still constrained to be one of the lowest inflation rates in the world.”
How can our country be experiencing such LOW RATES of inflation, especially since we have been witnessing an unprecedented increase in petrol prices and electricity tariffs?
Housing prices are not factored in the basket of goods and we all know how these have escalated in the last few years. (Only rental is included in CPI and the rates do not increase that often.) When the price of houses jump, it creates assets inflation which is not measured by the CPI (Consumer Price Index) and existing inflation rates do not give us a true picture of the situation in the country.
This can give us a wrong idea how the economy is going and is also what killed the US economy leading to the devaluation of its dollar. Similarly, Japan was affected during the 1980’s. The use of CPI as measure of inflation is fine provided the houses and assets prices remain stable.
Housing prices and that of other assets such as cars are shooting the roof which reduce our spending power which reduces the value of our money. So mere statistics do not give a true picture of inflation in our country! What more inaccurate figures! So a figure of 3% inflation rate means nothing to the city dweller who spends more than 1/3 of his income on housing! READ MORE HERE.
While Najib waxed lyrical about the government’s direct interventions to keep food prices under control, including subsidies amounting to M$20bn this year, price controls, and a new chain of 1Malaysia stores selling non-branded food products at a discount – 40 per cent for blackberry juice, the fact remains that liberal economists don’t fancy the idea of subsidies.
Despite whatever reassurances about subsidies, ministers are attempting to reduce the fiscal deficit from last year’s 5.6 per cent of GDP to a planned 5.4 per cent. However, the 10 per cent of spending that goes on subsidies actually diverts money from elsewhere and this includes investment. What will happen then?
Judging by the negative public response to the withdrawal of subsidies, it is likely that subsidies will remain for them to fulfill political pledges and to put them in good stead for the next GE.
Last week, Bank Negara surprisingly maintained the rates at 3 per cent thereby putting the emphasis on bank reserve ratios, raising them by 100 basis points to 4 per cent. Its effectiveness depends largely on the type of inflation that exists – i.e. cost push or demand pull inflation. Besides, inflation is not always caused by too much money in the system. It MAY be caused by increasing costs (such as of electricity tariffs) – which have nothing to do with increase in money supply. Read more here.
Consider this Bank Negara report:
Headline inflation, as measured by the Consumer Price Index (CPI), increased to 3.3% on an annual basis. The main contributors to inflation during the month were the food and non-alcoholic beverages and transport categories. Higher food prices were mainly due to the increase in meat prices. Inflation in the transport category increased during the month reflecting the effect from the upward adjustment in the price of RON97 from RM2.70/litre to RM2.90/litre due to the rise in the price of WTI crude oil in April.
Bank Negara also said:
