No inflation means no need to raise interest rates?
Inflation is NOT necessarily bad, in case we think inflation is always bad. High inflation is bad because it meant that people’s purchasing power is reduced. The reason is because our salary is adjusted every year (12 months) while inflation increase can happen every month. Briefly, too much money chasing too few goods and services. Thus, the goods and services will increase its price to weed out the demand from poorer consumers. Sad case but true. This is why inflation has to be there but should not be high. Let’s look at why negative inflation is not good too.
Negative inflation (deflation) which has happened in some countries is not positive yeah. Especially if prolonged. Briefly, when inflation is negative, prices are dropping. When prices are dropping, there is less incentive for any producer to increase the supply of goods and services. I mean if you are a property developer and the property prices are dropping, would you build more? So, is Malaysia having inflation or deflation then? Well, we have the latter.
Image below shows a basket of fruits. Imagine if the fruits kept getting cheaper every year. The growers would soon unable to cover their costs unless they also reduce the salary of their workers. When their workers have lower pay, they also could not buy other goods and services or demand a lower price instead….
Article in theedgemarkets.com Department of Statistics Malaysia (DOSM) says that Malaysia’s inflation, as measured by the Consumer Price Index (CPI), declined 1.5% in October 2020 from a year earlier. This was (ALREADY) the ninth consecutive month that the country experienced a deflation. On a year to date basis, the CPI for the period of January to October 2020 decreased 1% when compared to the same period last year.
In a statement today, DOSM chief statistician Datuk Seri Dr Mohd Uzir Mahidin attributed the decrease in the overall index to a decline in transport (-10.2%), housing, water, electricity, gas and other fuels (-3%), and clothing and footwear (-0.4%). He said, “Out of 552 items covered in the CPI, 337 items showed an increase in October 2020 against October 2019. On the contrary, 150 items declined, while 65 items were unchanged.” Do read the full article here: Article in theedgemarkets.com
Do we want salary increments?
Part of the reason why we get salary increments is also to ensure we are not worse off versus a year ago. Inflation will eat into our purchasing power, so the amount of money we receive should increase in-tandem too. So, if inflation is always negative and our salary stays the same, it also meant that with the same salary, we could buy more goods from the CPI basket. Maybe even property prices could start dropping more. In this case, no need to raise interest rates.
Let’s just have normal inflation
What is normal? Well, here’s that earlier article: Malaysia’s inflation expected to normalise in 2021. Let’s not be too concerned about the actual %. This can be very different from everyone. Let’s just say inflation rate of increase should always be lower than the salary increment % increase and that inflation rate of increase should always be around the same as the property price increase. If lower than property price increase, the owners will be sad. If higher than the property price increase, the buyers will be sad. So, just follow inflation rate lah.
Interest rates then?
With a low inflation, the interest rate faces less pressure and may be maintained as it is currently unless we truly needed to adjust this due to some unforeseen circumstances from overseas. So, it is not usual to raise interest rates if the inflation rate is dropping continuously. Of course if we have a good GDP growth in 2021, inflation will rise and the interest rate decision will likely be maintain or increase. We will see what happens.
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