MANAGING INFLATION
The formation of a high-level committee to address the situation is a step in the right direction
MALAYSIA has turned in a nice and neat number for inflation. The latest inflation rate for the country — estimated at 2.7 per cent for January — is quite low compared with that in many other countries, such as Indonesia (3.2 per cent) and the Philippines (3.9 per cent). The rates for Singapore and Thailand are much lower, while inflation is missing in much of western Europe.
Compared with Turkey, Egypt, Argentina and South Africa, our inflation rate is indeed minimal.
Having said that, Malaysians are concerned with the general price levels, especially the prices of fresh food items, particularly fish. This is understandable, especially for the low-income households as food constitutes a large share of their daily expenditure.
Inflation and cost of living are two different things, however. While inflation is an indicated rate of change in general price levels, cost of living is the absolute prices of goods and services that are consumed daily. We can have low inflation rates despite high prices of goods and services.
The formation of a high-level committee by the government, chaired by the deputy prime minister, to manage inflation is a step in the right direction. The committee may have to analyse various aspects of inflation and rising cost of living in the country.
Traditionally, Malaysia has addressed inflation using economic instruments to influence aggregate demand, including the use of monetary policy. The strengthening of the ringgit should assist in curbing the inflationary pressures to the extent that inflation is influenced by rising costs of imported items.
Malaysia also uses supply-side policy to control price escalation through import liberalisation and domestic production, the latter in the form of the Green Book programme (Program Buku Hijau) to encourage people to plant vegetables in their home compounds.
Malaysia is also noted for taking administrative action in the form of price controls of basic goods and services, particularly during festive seasons, using the Price Control Act. This instrument is, perhaps, found only in this country.
Some of these measures can be deployed immediately, subject, of course, to their relevance in the present context. This is for the agencies and authorities to assess.
While waiting for the analysis and recommendation of the highlevel committee, it may be worthwhile to examine the inflationary concern from two perspectives.
FIRST, the market structure perspective. Are the price increases or the high price levels caused by imperfections in the market place, such as monopoly, collusion and cartels, which lead to erosion of competition in the market? Market manipulation can also take place through the creation of artificial scarcity by powerful suppliers.
In this regard, the role of the agency that handles commerce and domestic supplies is critical. Understanding the domestic market structure, especially its weaknesses, is essential to uncover the imperfections at work.
SECOND, the perspective related to consumerism and its relevance to addressing inflation. Economics textbooks tell us that consumer sovereignty is paramount. Consumers are the king. This is not necessarily true in real life. Many consumers are indeed easily exploited by suppliers and traders as they do not have access to information on price-fixing and supply manipulation.
The consumers who are generally uninformed and unorganised can be vulnerable to unfair trade practices.
Rightly, the two concerns fall within the purview and responsibility of the Domestic Trade, Cooperatives and Consumerism Ministry, which is empowered to handle matters related to commerce in the country.
I hope the ministry’s officers study the issue of inflation so that proper controls can be emplaced to correct imperfections in the marketplace, especially collusion and cartels that erode fair pricing. The officers are duty-bound to ensure that such artificial scarcity created by powerful suppliers do not erode wage earners’ income.
As they say, inflation is like cutting your note, but without tearing it. Fixed wage earners know this well.
The writer is chairman of the Malaysian Institute of Economic Research