Inflation a concern as purchasing power falls

by LYDIA NATHAN / pic by BERNAMA

INFLATION would be a worrying trend for Malaysia if it is unaddressed in the long-term, Centre for Market Education CEO Dr Carmelo Ferlito said.

He said the full impact of the real scale of inflation has not been seen yet as the rise is driven by two main factors at present — lockdowns and expansive fiscal and monetary policies.

“There is an abundance of liquidity in front of a depressed economy. The current crisis with its deflationary tendencies, which we have seen in the salaries is covering the real extent of inflation. It will be clear once the current crisis is over.

“The downward salary trend makes things more difficult for the average person. A lower salary during a crisis would be good if it isn’t paired with inflation,” Ferlito told The Malaysian Reserve (TMR) recently.

He said the impact of inflation on the average person can vary depending on which prices are experiencing the biggest hike, reducing the number of items one can purchase with the monthly wage.

He said the deterioration of the purchasing power is a rare phenomenon in the post-Bretton Woods world where wages also deteriorated last year.

“On average, in 2020, the wages in Malaysia went down by 9%, which is a huge drop. So, we have rising prices and declining wages. Simply put, if inflation is at 4%, what an average person could previously buy with RM100 will now cost RM104, but, in the current scenario, the situation is aggravated by the fact that he or she does not earn RM100 anymore, but he earns RM91,” Ferlito explained.

He said the lockdowns have contributed to the inflationary pressures because on the one-end it creates supply-side shocks while on other forces governments into expansionary policies.

“I suggested that without lockdowns, which do not solve any medical emergency, we could have avoided stimulus packages and rather we could have saved resources to be invested where they were needed,” Ferlito said.

Oanda Asia Pacific senior market analyst Jeffrey Halley agreed the biggest impact is the loss of buying power, as the ringgit is weakened.

He said in the longer term, the reduction of buying power means consumers either rotate to cheaper substitutes or consume less.

“The latter scenario leads to a negative feedback loop where the consumer demand falls depressing the economy, although, in theory, that should lead to prices falling back and rebalancing,” he told TMR.

Halley said, however, inflation at 3.4% is not particularly worrisome in the context of the pandemic and inflation seen in other economies, except if it occurs over a prolonged period to have a material impact.

“A far greater concern for developing countries where much of the workforce is in the cash economy or gets paid week to week is the movement control restrictions. “They could prevent people from working and thus having money to pay for food and accommodation,” he said.

In this case, he said government fiscal support is required to alleviate the crisis by direct cash transfers to citizens as has occurred elsewhere in the world.

Unfortunately for Malaysia, he opined the government has failed to do this and its supposed stimulus is just “smoke and mirrors, with no real substance”.

Moody’s Analytics chief Asia Pacific economist Steve Cochrane forecast Malaysia’s full-year average inflation to be at 2.8% year-on-year, which is at the lower end of Bank Negara Malaysia’s forecast of 2.5% to 4%.

“Higher inflation now is driven by costlier transportation and higher Brent oil prices, but core inflation remains subdued, below 1%. Given the current Covid-19 situation and the downward revision of the GDP forecast, we don’t expect inflation to be a significantly worrying trend this year,” he noted.

He added there are two risks to the “everyday men on the street”. The first is the potential for higher fuel prices if global supply does not rise to meet improving global demand.

The second would be that extended movement control orders limit the ability to transport food and other daily necessities around the country.

“Neither of these conditions is assumed in our baseline forecast,” Cochrane noted.