Inflation: A Major Problem In Macroeconomics

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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…

The Minister in the Prime Minister’s Department, Idris Jala warned that Malaysia may go bankrupt by 2019 unless the government cut subsidies or restrict borrowing. Therefore, government has now tried to strengthen the fiscal position by implementing the goods and services tax (GST) which is effective from 1 April 2015 and the program of subsidy rationalism. A study shows that the implementation of fiscal reform will hit the middle-income group most badly. Although the official inflation will increase, it would not reflect the true impact of the reform on prices, since the Consumer Price Index includes items that excluded from GST (Nambiar, 2014). However, there are still some predictions that the fiscal reform in Malaysia will bring impact on inflation rate to the country in 2015.

Although the inflation rate in Malaysia fell to 2.6% in September 2014, it was expected to grow again due to the hike in fuel and petrol price in October and the implementation of GST in 2015. The inflationary pressure will continue to build up in Malaysian economy over the next two years. The Economic report forecasted that the inflation will be at between 4% and 5% in year 2015. Most economists suggested that the official CPI is expected to soar beyond the forecasted figure and the urban inflation will definitely be higher (Taing, …show more content…

This is because they worry about the rise in price and their ability to cope with GST. Besides, there is expectation that the government will announce another round of subsidy cuts which targeted high income group. Hence, the consumer consumption will likely to grow slower in 2015 as compared to year 2014 (Taing, 2014). This can be linked to the theory we have learned where the consumer will tend to reduce the consumption for the increase in tax burden. The drop in consumption will lead to lower GDP which indicates a slower economic growth (Taing,

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