Afternoon Highlight (29/11/11/196/506) Reducing the threat of inflation

Reducing the threat of inflation

IT will be tough for the government to cut subsidies and at the same time maintain Malaysia's low and stable price environment.
Inflation has been low despite the recent food and oil price shocks, mainly because almost 30 per cent of what's measured under the Consumer Price Index (CPI) are subsidised.
"Dismantling price controls and subsidies will be challenging, given the high persistence of inflation," said RAM Holdings Bhd group chief economist Dr Yeah Kim Leng.
He had presented a paper at the National Economic Outlook Conference 2012-2013, organised by the Malaysian Institute of Economic Research, recently.
There are two factors that affect consumer prices.Prices rise due to either a higher demand or a lower supply. When there is an acute shortage of goods, the price will jump.
The supply side or cost push factors are a bigger reason for inflation in Malaysia and other developing countries, Yeah said.
He reckoned that inflation would remain a key threat to the economy especially if global food and energy commodity prices remained high.
As a commodity exporter, Malaysia has made more money from rising commodity prices.
The rise in income has resulted in increased purchasing power and possibly pent-up demand, as exemplified by the current buoyant property market.
This means demand will be a more important factor in affecting consumer inflation trends as the country's drive towards a high income economy continues.
A stronger ringgit has also not helped much to reduce inflation in Malaysia.
But this should change when the government rationalised the items under its subsidy cut programme, he said.
Introducing minimum wage will also make it trickier to balance inflation and economic growth.
"The effects of wages on inflation as a cost-push factor and on household consumption as a determinant of income have important policy ramifications, given the soon-to-be introduced minimum wage law," Yeah added.

Source: Business Times
Date: 29 November 2011
Afternoon Highlight (29/11/11/196/506)