Cause Of Inflation In Malaysia

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Inflation is one of the major problems in macroeconomics. Generally in theory, inflation is an increase in the overall price level and it is calculated based on the Consumer Price Index (CPI). Inflation and economic growth are incompatible. Government around the world will take action to minimize the negative impact of inflation to a certain extent when inflation is expected to be happened. Low inflation rate and upward economic growth is impossible in reality (“Inflation and Economic Growth”, 2010). An article in April 2014 said that the major concerns of the average Malaysian is the rising of living. The subsidy rationalism programme has led to a 3.5% of inflation in March 2014 and it creates fear that the implementation of Goods and Services…show more content…
In theory, we learned that there are many reasons that will lead to inflation. Cost-push inflation, which is also known as supply-side inflation, is among the reasons why the inflation is caused by an increase in cost. In the case of Malaysia, the country faced cost-push inflation due to the government intention to manage its budget deficit. The subsidy cut of fuel in 2013 has associated with higher inflation due to the increasing of energy costs which was predicted by IMF research that it will slightly push the inflation from 2% to 2.6% in 2014 (“Fuelling Controversy”, 2014). Another example is the minimum wage policy of RM900 announced by Datuk Seri Najib in 2012. The economist warned that this minimum wage policy will lead to unemployment as well as inflationary pressure. According to SMI Association of Malaysia president, The Kee Sin, “train and upgrade” technology will be needed in order to ensure enough productivity gains to cope with an additional cost of up to 9% due to this policy. The Johor-based businessman and several economics also agreed that this additional cost will create inflationary effect (Teoh,…show more content…
History has shown that too much tightening of monetary policy to solve cost-push inflation will lead the economy to a recession. The central bank should tread carefully on how high to take interest rate. Increment in interest rate will lead to high cost of borrowing; thus, it will ultimately slow down the economic growth (Taing, 2014). This can also be linked to the theory that is covered in the unit plan. During the cost-push inflation, the government intervention by using contractionary monetary or fiscal policy will shift the aggregate demand curve to the right, thus, the price level decrease but the output level will decrease

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