Deflation better than inflation, right? :P

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Malaysians are worried about inflation. In fact every time the official inflation numbers are announced, it’s always considered as unrealistic. Then, everyone would claim that food prices are increasing so much because ringgit’s depreciating. Some parts of this argument about inflation is accurate. Well, now everyone wakes up to the news that Malaysia has hit deflation for the first time since the global financial crisis in 2019. As per Wikipedia, this is the economics definition of deflation. “In economics, deflation is a decrease in the general price level of goods and services. Deflation occurs when the inflation rate falls below 0%. Inflation reduces the value of currency over time, but deflation increases it. This allows one to buy more goods and services than before with the same amount of currency.” (please read that last sentence for three times yeah)

Article in TheStar.com.my Malaysia’s economy is in deflation mode for January 2019 and this is the first time we have this since 2019. The main reason stated is due to fuel price dropping. Consumer price declined 0.7% from a year ago after hovering below 1% in the previous seven months, according to the statistics department. Fuel subsidy is now set weekly and this has led to a 7.8% decline in transport costs in January from a year ago. The central bank has kept interest rates unchanged at 3.25% since raising it in January 2018. From June to November 2009, Malaysia had deflation too. That year, our economy contracted by 1.5%. Kuala Lumpur is the only state or federal territory that saw a CPI increase in January, with inflation at 0.2%. Article in TheStar.com.my 

Briefly, inflation needs to be controlled because this spike is due to demand rising too fast. It’s also explained as too much money chasing too few goods. As everyone knows, when demand is far higher than supply, the prices will rise. This is why when the economy is growing and inflation is rising, the central bank also raise interest rates to cool the demand which will then deflate the inflation. Deflation meanwhile will tell us that the demand may not be that robust and thus businesses may have reduced their prices to secure the demand. This is why it’s actually not a happy news for the economy if this is continuous for many more months to come. So, is deflation better than inflation? Let’s just aim at low inflation yeah. Cheers.

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written on 24 Feb 2019

Next suggested article: When FD rate is below inflation… for Malaysia

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