by ANIS HAZIM / pic BERNAMA

ECONOMISTS are at odds over Economy Minister Rafizi Ramli’s (picture) plan to tackle inflation and views on why the issue persists.

On Dec 23, the minister was quoted in a press conference as saying that Malaysian consumers’ spending habit is the main driver of inflation as the demand — particularly, for foods and non-alcoholic beverages — has not lessened despite rising prices.

Centre for Market Education (CME) CEO Dr Carmelo Ferlito argued that Rafizi’s statement was imprecise. 

Theoretically, inflation is defined as an excessive increase in the quantity of money, leading in turn to an increase in prices, according to economist philosopher Friedrich Hayek.

“Therefore, we may say that inflation is produced by a more rapid increase in the quantity of money than in the quantity of goods and services available for purchase, as such, an increase raises prices in terms of that money,” Ferlito said in a statement.

Although he agreed that Malaysians may have bad consumption habits — testified by the high level of household debt over the GDP which is top in Asia — however, he said the problem existed prior to the pandemic and that it cannot be addressed by “changing elasticity”, as suggested by the ministry.

“The government cannot control or interfere with elasticity, but at best it can incentivise initiatives that promote financial literacy for better spending decisions,” he said. 

Moreover, he viewed that Rafizi did not take into account the concept of elasticity of demand that measures how responsive the quantity demanded to a price changes.

“When the price of a good increases, individuals and businesses will buy less. But how much less? A lot or a little?” he stressed.

He opined that Rafizi has overlooked the elasticity of demand that tends to be low for necessary goods and with fewer substitutes, in particular in the short run.

Hence, CME proposed for the government to allow productivity growth deflation by nurturing an environment conducive to innovation, allow cash-building deflation, gradually reduce government spending to reduce the quantity of money in circulation, and introduce reforms to reinstate the primacy of balanced budgets.

Adli Amirullah of the Malaysian Youth Council, on the other hand, said that Rafizi’s plan to tackle inflation was “really refreshing” as it would be applying the methods of supply and demand.

“It is a commendable announcement because, for the first time, our government’s plan to tackle inflation lay beyond just the price control method,” he told The Malaysian Reserve.

On the supply side, the government intends to increase the supply of goods by providing more incentives to sellers to increase supply, promoting more competition for more suppliers, and lowering tariffs and taxes to reduce input costs in order to increase production.

“This method is particularly very important when tackling inflation because classical economics has always dictated that higher supply will lead to lower price. 

“From a layman’s point of view, more supply means consumers have more choices, which will lead to stabilising the price at a lower level,” he said.

The economist was also pleased that the minister plans to address inflation through “behavioural economics”.

“Behavioural economics is very complex as different consumers have different behaviour when it comes to consumption. Hence, the idea to nudge the elasticity of consumer behaviour with behavioural economics by utilising the open data concept is really revitalising. 

“Although, I must give credit to the Ministry of Domestic Trade and Living Costs for trying to do this by introducing the PriceCatcher app a few years ago,” he noted. 

He was optimistic that the open data will further enhance the intended effect of price monitoring by the consumer. 

“With the open data, the public will innovate themselves to come out with an app or platforms to compare prices. 

“Developers and companies will compete to produce the best apps out there to compare prices for consumers because companies value consumer data so much, and finally, we as the consumer will have more efficient and better applications to monitor prices in the market,” he added.