Food prices will be affected the most

By FAYYADH JAAFAR / Pic by MUHD AMIN NAHARUL

The policy to increase the minimum wage to RM1,500 per month will affect the prices of food in the country as well as the prices of other goods.

Dr. Carmelo Ferlito, CEO of Center Market Education (CME), said low-income earners will be hugely affected by the policy, which is implemented on May 1.

“Can the new minimum wage bring about an increase in food prices? Yes, it can. This is because the minimum wage policy will affect low-earners, who have a high propensity to spend on primary expenditures such as food,” he tells The Malaysian Reserve.

According to him, the price hike depends on demand and supply, as well as the permanent component of money creation.

“We must refer, then, to the food price increase. The latest food price increase was, on an annual basis, 4%.”

“We may get close to 10% due to different elements: international tensions; supply-chain disruptions due to the suicidal Chinese COVID “strategy”, sustained consumer demand, and the permanent component of money creation (summing up 2020 and 2021, M1 rose by 28% and M2 by 12%, while GDP declined by 2.7%).”

On May 12, 2022, Utusan Malaysia reported that food costs will likely rise by 50-60% starting next month, following the implementation of the new RM1,500 minimum wage.

According to the report, prices for various everyday needs such as poultry and vegetables had already risen prior to the Aidilfitri celebration last week, and businesses across the country had implemented price increases on their products.

Ferlito said it is important to distinguish between one-time jumps in most prices without a continuing rise (which is not inflation) and inflation in its appropriate meaning, which usually means a continuing general rise in most prices.

“The difference is important because they are caused by different events. The latter can be caused by demand pressures or supply-chain shocks (wars, lockdowns, etc.); these events are usually temporary. However, the necessary and sufficient condition for a persisting, increasing price level is that the quantity of money increases relative to the stock of real goods and services. That and only that is the source of persistent inflation.”

Touching on COVID-19 policies, he said the government embarked on numerous fiscal stimulus plans, supported by very expansive monetary policies that led to inflation.

“While lockdowns damaged the real economy, expansive policies increased the quantity of money in circulation; this was a textbook example of inflation creation. In an attempt to withdraw liquidity from the system, BNM (Bank Negara Malaysia) started to increase the interest rate. This most probably has a contractionary effect.”

He suggests the government should embark on a programme of government spending cuts to reduce the budget deficit.

“We can’t avoid a certain recession if we want to bring prices down. It is the price we pay for reckless policies that were implemented without thinking about their medium and long-term consequences. We can’t avoid a certain recession if we want to bring prices down. It is the price we pay for reckless policies that were implemented without thinking about their medium and long-term consequences,” he said, adding that the labour market should be liberalised further.

When asked whether the government should intervene in the market, he says yes, but not in the sense of subsidies and price ceilings, but through market mechanisms such as free trade agreements.

“Subsidies and ceilings are not a solution because, by altering market prices, they hide price tensions rather than solve them. One of the most effective channels for food security (and affordability) is free trade. But free trade is not what we read in the CTPTT. True free trade involves free exchanges.”

In response to reports of companies charging service fees for buying groceries online instead of going to brick-and-mortar stores, he says this is a consequence of the post-lockdown era.

“Shops and restaurants start to be filled with “real” customers, and therefore deliveries become a burden while we are faced with labour scarcity. If retailers are trying to protect their businesses (which means protecting jobs too), we can’t blame them. But we should blame the main culprit of inflation: the printing press (which belongs to the government), together with other disruptive policies such as lockdowns.”