What’s happening to the economy if the inflation rate is close to zero? What about if it is expected to normalise in 2021? Generally, if inflation it’s going up, it should be bad news, right? Since inflation is supposed to be bad. If inflation is staying near zero, is that great news for the country?
Well, if we use Japan as a comparison, except for 2014, Japan’s inflation has been near to zero or below zero from 2010 – 2020. Somehow, the Japanese are just not spending much money. They save a LOT of their earnings. In June 2020, they saved an average of 62% of their earnings!! I repeat, 62%… (click here to view the numbers if you like) Okay, now you know that if inflation is always very low, it does not bode well for the economy especially if the consumption is very low.
Coming back to us here. Malaysia has had inflation close to zero for 2 years now. In 2021, it is expected to go up to 2.5% and it’s called normalising. Article in themalaysianreserve.com to follow after the definition of inflation as below:
Definition of inflation? According to investopedia.com: Inflation is a quantitative measure of the rate at which the average price level of a basket of selected goods and services in an economy increases over some period of time. It is the rise in the general level of prices where a unit of currency effectively buys less than it did in prior periods. Often expressed as a percentage, inflation thus indicates a decrease in the purchasing power of a nation’s currency.
Article in themalaysianreserve.com Ministry of Finance (MoF) said that MALAYSIA’S Inflation rate is expected to normalise at 2.5 per cent in 2021 and this is in line with better economic prospects and higher crude oil prices.
It said in its Economic Outlook report, “The Consumer Price Index (CPI) shrank by one per cent during the first eight months of 2020 and is expected to continue for the rest of the year. The contraction was due to lower pump prices on account of weaker global crude oil prices, as well as the discount given on electricity bills as part of the stimulus measures.”
MoF also said Producer Price Index (PPI) is also expected to improve in 2021 following the projected recovery of the domestic and global economy. The PPI by local production declined by 2.4 per cent during the first eight months of 2020 and is expected to remain stable due to low input cost. For a full report, do refer to: Article in themalaysianreserve.com
Some inflation is always a good indicator of demand
Briefly, when people have salary and they feel confident with the state of the economy, they may spend more. When they spend more, the demand increases but the supply may need time to catch up. This is why the prices of some goods will move up to maximise potential profit. In other words, inflation rate goes up. Soon, businesses will increase their production in order to meet the demand. In this case, demand pushes more supply and in order to produce more, the businesses will need to hire more people. This will create more jobs, more people earn salaries and these would in turn drive up demand further. It’s a cycle.
High inflation is NOT good (speculative activities should be curbed)
If demand increases very suddenly, this may be due to speculative demand. This is not an ideal situation and would need to be controlled. This was why Bank Negara Malaysia (BNM) required all banks to be more conservative and the term Responsible Lending become common. Instead of gross pay, the calculation of loans are now based on net pay. Instead of 10% Loan-To-Value for all properties, it was increased to 30% from the third property onwards.
A normalising inflation rate is considered a positive sign in this case. Hopefully with COVID-19 vaccines arriving in Q1 of next year, we could go back to normal. Drink coffee with friends occasionally. Changing jobs for higher pay may just become in-trend again. Basically, a downtrend of unemployment rate is another very good sign to watch out for. As per all the predictions, 2021 is likely to be a positive year. Let’s make it a super positive one then. Thank you.
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