THE EFFECTS OF INFLATION ON MALAYSIAS ECONOMY

Malaysia is a developing country that managed to score as South East Asias

3rd largest economy in year 2007 (HV, Tonby, & Thompson, 2014). Malaysia was
admired by many countries for successfully maintaining a low and stable inflation rate
that averaged at 3.14 percent from 1964 to 2013 despite hitting an all time high at
17.33 percent in 1974, refering to Figure 1.

Figure 1: Inflation rate in Malaysia from 1961 to 2013

Source: The World Bank

As noted by McConell, Brue and Flynn, inflation is defined as the increase in the
aggregate level of prices of goods and services over a period of time. When price
levels increase, consumers purchasing power erodes. This translates to a decrease in
the real value of the currency in which one unit of it would now buy the consumer
fewer goods than before (McConell, Brue, & Flynn, 2011). The main measure of
inflation rate is the Consumer Price Index (CPI) - the annual percentage change in the
general price index over time. Given the satisfying track record of inflation in

Malaysia, the statistics are to experience more fluctuations in year 2014 to the coming
year 2015 and 2016. This occurs mainly due to the changes in fuel subsidies and the
plan to implement Goods and Service tax (GST) by the government. Hence, this paper
aims to discuss the effects of the aforementioned factors on inflation rate and the
affects that it will have on the Malaysias economy.

Global commodity prices have been an important driver of domestic inflation

in Malaysia. The transferred effects to inflation are mainly controlled by the
governments administered price mechanism. In 2008, the global commodity prices
experienced a sharp increase, refering to Figure 2.

Figure 2: Global Commodity Prices in 2008 and 2011

Source: International Monetary Fund (IMF)

This is due to the increase of more than twofolds in global crude oil prices and the rise
by more than 50% in global food prices. Poor harvest in March 2008 in the main riceexporting countries resulted to supply shortages, which then caused the pressure on
prices. Fortunately for government control over certain domestic food and energy
prices, the impact of the dramatic increase in the prices on inflation was delayed.

The average inflation rate was still under control at 2.9% in the first five months of
2008.
The new fuel subsidy scheme is expected to take effect on the third quarter of
2015 for the purpose of limiting the puchase of subsidised fuel for certain consumer
groups. Individuals with income between RM 5,000 to RM 10,000 are only entitled
up to 300 litres of subsidised RON95 petrol per month (Gomez, 2014). The effects of
the subsidy rollback on inflation will not be significant as an estimate of 60% of
consumers would still be able to enjoy purchasing subsidised fuel under the new fuel
subsidy scheme. According to CIMB Research, the inflation rate is projected to rise
up to 4.0 percent in 2015, referring to Figure 3. The officials of the International
Monetary Fund (IMF) also support this notion.

Figure 3: Expected inflation rate given the new fuel subsidy scheme in 2015
Source: CIMB Research

Inflation rate is expected to exceed 4.0% in 2Q15 and 3Q15 after the
implementation of the Goods and Service Tax (GST) in April 2015 (Kumar, 2013).
The effect of the GST on inflation is presumed to be largely one-off. This statement is
backed by the similar patterns shown in consumer price indices presented by
Singapore, Thailand, Indonesia and etc. in Figure 4.

Figure 4: Consumer price indices before and after GST implementation

Source: IMF, National Sources, CIMB Research

Thereafter, we expect the inflation rate to moderate out in 4Q15. The GST impact is
expected to dissipate by early 2016. This claim is formed based on the previous hikes
in administered prices in Malaysia that suggest a one-off increase will not
continuously accelerate the prices as shown in Figure 5.

Figure5:Previousincreaseinadministeredpriceshadmainlyoneoffimpact
Source:DOSM,CIMBResearch

Works Cited
McConell, C., Brue, S., & Flynn, S. (2011). Macroeconomics (19th
Edition ed.). McGraw-Hill.
HV, V., Tonby, O., & Thompson, F. (2014, May). Understanding
ASEAN: Seven things you need to know. McKinsey & Company
Insights and Publications .
Gomez, J. (2014, June 5). Putrajaya's new fuel subsidy scheme bad
for people, says critics. The Malaysian Insider .
Kumar, P. (2013, December 17). IMF: Msian inflation may touch 4%
in 2015. Retrieved March 20, 2015, from Free Malaysia Today:
http://www.freemalaysiatoday.com/category/business/2013/12/17/im
f-m%E2%80%99sian-inflation-may-touch-4-in-2015/