PREFACE Inflation is a situation of sustained and inordinate increase in the prices of goods and services.

Read on to understand the various types of inflation. One of the economic effects of inflation is the change in the marginal cost of producing money. This involves the appropriate 'price' of money which, in this case, is the nominal rate of interest. This 'price' indicates the return which has to be pre-determined to hold back the printing presses, in place of some other assets which offer the market interest rate. In addition, if a country has a higher rate of inflation than other countries, its balance of trade is likely to move in an unfavorable direction. This is because there is a decline in its price competitiveness in the global market. MALAYSIA INFLATION RATE The inflation rate in Malaysia was recorded at 1.40 percent in August of 2012. Historically, from 2005 until 2012, Malaysia Inflation Rate averaged 2.7 Percent reaching an all time high of 8.5 Percent in July of 2008 and a record low of -2.4 Percent in July of 2009. Inflation rate refers to a general rise in prices measured against a standard level of purchasing power. The most well known measures of Inflation are the CPI which measures consumer prices, and the GDP deflator, which measures inflation in the whole of the domestic economy. This page includes a chart with historical data for Malaysia Inflation Rate.

2

Contents

1. 2. 3. 4. 5. 6. 7. 8.

Preface & Inflation in Malaysia………………………………… Introduction of Inflation…………………………………… Causes of Inflation………………………………………….. How is inflation calculated…………………………………. Problems of inflation………………………………………... Economic Effects of inflation……………………………….. Measure to Control Inflation………………………………. Type of inflation……………………………………………... 9. Conclusion…………………………………………………... 10. Bibliography……………………………………………………

3

INTRODUCTION OF INFLATION
Inflation is when prices continue to creep upward, usually as a result of overheated economic growth or too much capital in the market chasing too few opportunities. Usually wages creep upwards, also, so that companies can retain good workers. Unfortunately, the wages creep upwards more slowly than do the prices, so that your standard of living can actually decrease.. How Does Inflation Impact our Life? Inflation hurts your standard of living because you have to pay more and more for the same goods and services. If your income doesn't increase at the same rate as inflation, you will find your standard of living declining even though you are making more. Also, inflation doesn't impact everything equally, so that some things (such as gas prices) can double while other things (your home) may lose value. For this reason, it makes financial planning more difficult. Inflation is really bad for your retirement planning because your target will have to keep getting higher and higher to pay for the same quality of life. In other words, your savings will buy less and less, so you will need to save more and more. Inflation and the economy of a country are closely related. The effect on the economy of any country is not immediate or it does not affect the economy overnight. There is a cumulative effect. Several such changes build up to bring about a big change. The economy of a country is affected by inflation in a number of ways.

4

Inflation and the economy both influence all the major macroeconomic indicators of a country. The various macroeconomic indicators include the following:
• • • • • • • • • •

Gross domestic product or GDP Producer price index (industrial) Consumer price indices Industrial production Capital Investment Agricultural production Export Import Demography Debt

Inflation not only affects the macroeconomic indicators, it affects the living standards of the people. As the percentage of inflation increases, the cost of all commodities also increases. This in turn influences trade. When exchange rates are affected, the interest rates cannot be far behind.

Inflation and its effect on economy may be of two types:

Expected inflation

5

Unexpected inflation

6

CAUSES OF INFLATION
A sustained rise in the prices of commodities that leads to a fall in the purchasing power of a nation is called inflation. Although inflation is part of the normal economic phenomena of any country, any increase in inflation above a predetermined level is a cause of concern. The basic causes of inflation were covered at AS level. This note considers the demand and supply-side courses in more detail including the impact of changes in the exchange rate and the prices of goods and services in the international economy.

Cost Push Inflation:Cost-push inflation occurs when businesses respond to rising production costs, by raising prices in order to maintain their profit margins. There are many reasons why costs might rise: Rising imported raw materials costs perhaps caused by inflation in countries that are heavily dependent on exports of these commodities or alternatively by a fall in the value of the pound in the foreign exchange markets which increases the UK price of imported inputs. A good example of cost push inflation was the decision by British Gas and other energy suppliers to raise substantially the prices for gas and electricity that it charges to domestic and industrial consumers at various points during 2005 and 2006. Rising labour costs - caused by wage increases which exceed any improvement in productivity. This cause is important in those industries which are ‘labourintensive’. Firms may decide not to pass these higher costs onto their customers (they may be able to achieve some cost savings in other areas of the business) but in the long run, wage inflation tends to move closely with price inflation because there are limits to the extent to which any business can absorb higher wage expenses. 7

Higher indirect taxes imposed by the government – for example a rise in the rate of excise duty on alcohol and cigarettes, an increase in fuel duties or perhaps a rise in the standard rate of Value Added Tax or an extension to the range of products to which VAT is applied. These taxes are levied on producers (suppliers) who, depending on the price elasticity of demand and supply for their products, can opt to pass on the burden of the tax onto consumers. For example, if the government was to choose to levy a new tax on aviation fuel, then this would contribute to a rise in cost-push inflation. Cost-push inflation can be illustrated by an inward shift of the short run aggregate supply curve. This is shown in the diagram below. Ceteris paribus, a fall in SRAS causes a contraction of real national output together with a rise in the general

8

level

of

prices.

Demand Pull Inflation:-

9

Demand-pull inflation is likely when there is full employment of resources and when SRAS is inelastic. In these circumstances an increase in AD will lead to an increase in prices. AD might rise for a number of reasons – some of which occur together at the same moment of the economic cycle

A depreciation of the exchange rate, which has the effect of increasing the price of imports and reduces the foreign price of UK exports. If consumers buy fewer imports, while foreigners buy more exports, AD will rise. If the economy is already at full employment, prices are pulled upwards.

A reduction in direct or indirect taxation. If direct taxes are reduced consumers have more real disposable income causing demand to rise. A reduction in indirect taxes will mean that a given amount of income will now buy a greater real volume of goods and services. Both factors can take aggregate demand and real GDP higher and beyond potential GDP.

The rapid growth of the money supply – perhaps as a consequence of increased bank and building society borrowing if interest rates are low. Monetarist economists believe that the root causes of inflation are monetary – in particular when the monetary authorities permit an excessive growth of the supply of money in circulation beyond that needed to finance the volume of transactions produced in the economy.

Rising consumer confidence and an increase in the rate of growth of house prices – both of which would lead to an increase in total household demand for goods and services

10

The effects of an increase in AD on the price level can be shown in the next two diagrams. Higher prices following an increase in demand lead to higher output

11

and profits for those businesses where demand is growing. The impact on prices is greatest when SRAS is inelastic.

The

wage

price

spiral

“expectations-induced

inflation”
Rising expectations of inflation can often be self-fulfilling. If people expect prices to continue rising, they are unlikely to accept pay rises less than their expected inflation rate because they want to protect the real purchasing power of their incomes. For example a booming economy might see a rise in inflation from 3% to 5% due to an excess of AD. Workers will seek to negotiate higher wages and there is then a danger that this will trigger a ‘wage-price spiral’ that then requires the introduction of deflationary policies such as higher interest rates or an increase in direct taxation.

12

Inflation influences in the British economy

o

Average earnings comprise basic pay + income from overtime payments, productivity bonuses, profit-related pay and other supplements to earned income Productivity measures output per person employed, or output per person hour. A rise in productivity helps to keep unit costs down. However, if earnings to people in work are rising faster than productivity, then unit labour costs will increase

o

13

o

The growth of unit labour costs is a key determinant of inflation in the medium term. Additional pressure on prices comes from higher import prices, commodity prices (e.g. oil, copper and aluminum. Prices also increase when businesses decide to increase their profit margins. They are more likely to do this during the upswing phase of the economic cycle.

o

HOW IS INFLATION CALCULATED?
The Retail Price Index surveys changes in the prices of goods and services.
GOOD CDs Sweets Bread 2000 PRICE 9.00 0.20 0.80 2001 PRICE 9.50 0.25 1.00 CHANGE 0.50 0.05 0.20

14

Total INFLATION

10.00

10.75

0.75 0.75 or 7.5%

In the above example prices have gone up by £0.75 or 7.5%

PROBLEMS OF INFLATION
• Prices increase therefore people may buy fewer goods, the economy may

suffer • People need to keep asking for pay increases to match price rises. This can cause problems at work • If people are on fixed incomes e.g. pensioners or students. They will be worse off because they will be able to buy fewer goods • The costs to businesses may increase. They may cutback on production. • If the prices of UK goods increase too much then people and businesses may start to import more goods from abroad because they are cheaper. This will cause major problems for the economy. inflation and the housing market Inflation in the housing market due to demand pull inflation Notting Hill is a very popular district of London. In 1999 the average house sold for a price of £200,000. This was satisfactory to both buyers and sellers of houses.

15

However in the year 2000 houses suddenly became far more popular in Notting Hill. This was due to a number of reasons • • • popularity feelgood income tax cuts of the factor meant that area due and people had to Hugh more Grants to film spend

consumer money

confidence

• lower interest rates meant that mortgage repayments were lower

INFLATION, ECONOMIC INFLATION
Inflation means a persistent rise in the price levels of commodities and services, leading to a fall in the currency’s purchasing power. The problem of inflation used to be confined to national boundaries, and was caused by domestic money

16

supply and price rises. In this era of globalization, the effect of economic inflation crosses borders and percolates to both developing and developed nations. Central bankers believe that mild inflation, in the 1 to 2 per cent range, is the most benign for a country’s economy. High inflation, stagflation or deflation are all considered to be serious economic threats.

CAUSES OF ECONOMIC INFLATION
The following factors can lead to inflation:
• • • • •

Increases in production costs. Tax rises. Declines in exchange rates. Decreases in the availability of limited resources such as food or oil. War or other events causing instability.

Economists generally believe that money supply is the key cause of inflation; in 2008, however, skyrocketing prices of oil, food and steel caused runaway levels of inflation in the world economy that collapsed only because of the global Financial Crisis.

ECONOMIC EFFECTS OF INFLATION
One of the economic effects of inflation is the change in the marginal cost of producing money. This involves the appropriate 'price' of money which, in this case, is the nominal rate of interest. This 'price' indicates the return which has to be pre-determined to hold back the printing presses, in place of some other assets which offer the market interest rate. In addition, if a country has a higher rate of inflation than other countries, its balance of trade is likely to move in an unfavorable direction. This is because there is a decline in its price competitiveness in the global market. A high rate of inflation can cause the following economic impediments:

17

• • •

The value of investments are destroyed over time. It is economically disastrous for lenders. Arbitrary governmental control of the economy to control inflation can restrain economic development of the country.

MEASURES TO CONTROL INFLATION
The central banks, monetary authorities or finance ministries of most nations have the authority to take economic measures to control rising inflation by regulating the following factors:

Reducing the central bank interest rates and increasing bank interest rates. Regulating fixed exchange rates of the domestic currency. Controlling prices and wages. Providing cost of living allowance to citizens in order to create demand in the market.

• • •

Different schools of thought emphasize different factors as the root cause of inflation. However, there is a consensus on the view that economic inflation is caused either by an increase in the money supply or a decrease in the quantity of goods being supplied, and that the effects of either high inflation or deflation are extremely damaging to the economy.

18

TYPES OF INFLATION
Inflation is a situation of sustained and inordinate increase in the prices of goods and services. Read on to understand the various types of inflation. When there is a rise in general price level for all goods and services it is known as inflation. An inflationary movement could be because of the rise in any single price or a group of prices of related goods and services.

There are four main types of inflation. The various types of inflation are briefed below.

1. Wage Inflation: Wage inflation is also called as demand-pull or excess
demand inflation. This type of inflation occurs when total demand for goods and services in an economy exceeds the supply of the same. When the supply is less, the prices of these goods and services would rise, leading to a situation called as demand-pull inflation. This type of inflation affects the market economy adversely during the wartime.

2. Cost-push Inflation: As the name suggests, if there is increase in the cost
of production of goods and services, there is likely to be a forceful increase in the prices of finished goods and services. For instance, a rise in the wages of laborers would raise the unit costs of production and this would lead to rise in prices for the related end product. This type of inflation may or may not occur in conjunction with demand-pull inflation.

3. Pricing Power Inflation: Pricing power inflation is more often called as
administered price inflation. This type of inflation occurs when the business houses and industries decide to increase the price of their respective goods and services to increase their profit margins. A point noteworthy is pricing power inflation does not occur at the time of financial crises and economic depression, 19

or when there is a downturn in the economy. This type of inflation is also called as oligopolistic inflation because oligopolies have the power of pricing their goods and services.

4. Sectoral Inflation: This is the fourth major type of inflation. The sectoral
inflation takes place when there is an increase in the price of the goods and services produced by a certain sector of industries. For instance, an increase in the cost of crude oil would directly affect all the other sectors, which are directly related to the oil industry. Thus, the ever-increasing price of fuel has become an important issue related to the economy all over the world. Take the example of aviation industry. When the price of oil increases, the ticket fares would also go up. This would lead to a widespread inflation throughout the economy, even though it had originated in one basic sector. If this situation occurs when there is a recession in the economy, there would be layoffs and it would adversely affect the work force and the economy in turn.

Other Types of Inflation Fiscal Inflation:
Fiscal Inflation occurs when there is excess government spending. This occurs when there is a deficit budget. For instance, Fiscal inflation originated in the US in 1960s at the time President Lydon Baines Johnson. America is also facing fiscal type of inflation under the presidentship of George W. Bush due to excess spending in the defense sector.

Hyperinflation:
Hyperinflation is also known as runaway inflation or galloping inflation. This type of inflation occurs during or soon after a war. This can usually lead to the complete breakdown of a country’s monetary system. However, this type of inflation is short-lived. In 1923, in Germany, inflation rate touched approximately 322 percent per month with October being the month of highest inflation. 20

How to reduce the level of inflation in an economy 1. REDUCE DEMAND PRESSURES If inflation is caused by high demand then * Raise interest rates to reduce consumers disposable incomes * Raise interest rates to discourage borrowing and demand * Raise taxes to reduce disposable income and spending

2 REDUCE COST PUSH PRESSURES • Limit wage increases if possible e.g. public sector workers • Force electricity and gas companies to hold their prices • Increase the value of £ in order to reduce the cost of importing 3. REDUCE MONEY SUPPLY PRESSURES If inflation is caused by too much money in the economy • Print less money • Withdraw some money from circulation. Zimbabwe Inflation 'to Hit 1.5m%' Zimbabwe's inflation will rocket to 1.5m% before the end of the year, the US ambassador to Harare predicted today, forecasting massive disruption and instability that will drive President Robert Mugabe from office. In a telephone interview with the Guardian, Christopher Dell said prices were going up twice a day, sapping popular confidence in a government that is now "committing regime change on itself".

21

"I believe inflation will hit 1.5m% by the end of 2007, if not before," Mr Dell said. "I know that sounds stratospheric but, looking at the way things are going, I believe it is a modest forecast." Zimbabwe's official inflation is 4,500% but independent economists and retailers say it is actually above 11,000% and picking up speed. The black market rate for the pound soared from Z$160,000 last week to Z$400,000 this week. The US dollar rate has topped Z$250,000, while the official rate is fixed at just Z$250. Mr Mugabe stubbornly insists that the Zimbabwe currency must not be devalued. "Prices are going up twice a day, in some cases doubling several times a week," said Mr Dell, who is approaching the end of his posting to Zimbabwe. "It destabilizes everything. People have completely lost faith in the currency and that means they have lost faith in the government that issues it. "By carrying out disastrous economic policies, the Mugabe government is committing regime change upon itself," he said. "Things have reached a critical point. I believe the excitement will come in a matter of months, if not weeks. The Mugabe government is reaching end game, it is running out of options." For Zimbabweans living in the turmoil of economic meltdown, hyperinflation is spreading poverty, as even basic goods become unaffordable. Supermarkets' trollies lie idle as few can afford to buy more than a handful of goods. Government regulations will only permit withdrawals from banks of Z$1.5m per day, which is not enough to buy a week's worth of groceries.

22

At golf courses, golfers pay for their drinks before they set off on their round, because the price will have gone up by the time they have finished the 18th hole. One individual was recently told by a pension company that it would no longer send him statements as his fund was worth less than the price of a stamp. "I can barely cope with inflation in the thousands, but millions? We will die," said Iddah Mandaza, a Harare factory worker. Mr Mandaza said some workers are now saving on transport costs by "going to their jobs on Monday and sleeping at the workplace until Friday. They all share their meals. That's what they do to get by." Many Zimbabweans are resorting to barter. "I traded some soap for two buckets of maize meal [Zimbabwe's staple food]. It was far much better than trying to buy it in the shops," said worker Richard Mukondo. "People in the rural areas are even worse off. You can see they are hungry and their clothes are in tatters. They trade in whatever they can produce: tomatoes, onions, chickens and eggs." Tony Hawkins, professor of economics at the University of Zimbabwe, said that no one holds cash in the country any more. "People spend it as soon as they get it. Goods hold their value, not money. The government has run out of solutions. At this rate perhaps inflation could hit 1m%, but one gets a sense that things will crack before then."

At the other end of the technological scale, enterprising Zimbabweans abroad have set up internet trading schemes, such as Mukuru.com, in which Zimbabweans overseas pay for goods with foreign currency and then vouchers

23

for fuel, food and medicines are sent to recipients in Zimbabwe via email or on their cell phones.

This business has thrived because more than three million Zimbabweans - a quarter of the country's 12 million people - now live abroad. Half of Zimbabwe's families depend on remittances from overseas to pay basic monthly bills, according to a recent survey by the University of Zimbabwe. Mr Dell, 51, who has had a tumultuous three years as ambassador to Zimbabwe, said that Mr Mugabe faces further trouble from his army, which used to be considered solidly loyal to the president. Last week six men, including an army private and a retired senior officer, were charged in court for plotting against the president. He said the allegations of the coup plot show divisions within Mr Mugabe's ruling party, the Zimbabwe African National Union-Patriotic Front (Zanu-PF). "I don't believe it was a real coup plot. I think it shows one side of Zanu-PF plotting against the other. The bitter factional infighting is now dragging in the military. That cannot be good news for Mugabe," said Mr Dell. South African president Thabo Mbeki's efforts to mediate between Zanu-PF and the opposition Movement for Democratic

24

Inflation and its impact on the Malaysia economy
The Consumer Price Index (CPI) in Malaysia fell further to 1.6 per cent in June from 1.7 per cent in May. The growth, in keeping with market expectations, is expected to pick up with the coming Ramadan festivities, say economists. According to the Statistics Department, the CPI for the six months rose by two per cent to 104.6 compared with 102.5 in the same period last year. Compared with May, it increased by 0.1 per cent. Bank of America Merrill Lynch economist Dr Chua Hak Bin said the higher month-on-month increases in food (0.6 per cent) were offset by falls in transport (-0.3 per cent), clothing/footwear (-0.2 per cent), communication (-0.1 per cent) and education (-0.1 per cent). "Food prices might continue to creep higher in anticipation of the upcoming fasting month, which starts in late July," he said. The research house has lowered the CPI forecast to two per cent (from 2.6 per cent) in 2012 and 2.5 per cent (from three per cent) in 2013, given the tame inflation readings. Inflation has been sliding lower since the start of the year, while holding subsidised fuel prices constant has sheltered transport costs from volatile global oil prices. Housing, utilities and fuels, which account for 22.6 per cent weight in the CPI basket, has also been contained, helped in part by price controls. Chua expects Bank Negara Malaysia to maintain its benchmark policy interest rate at three per cent at the next monetary policy meeting on September 6 and for the rest of the year. "Inflation remains tame while growth is well supported by resilient domestic demand," he said.

25

Inflation Rate, Rate of Inflation
The inflation rate is the percentage by which prices of goods and services rise beyond their average levels. It is the rate by which the purchasing power of the people in a particular geography has declined in a specified period. The rate of inflation may be calculated weekly, monthly or annually. However, it is always expressed as an annualized figure. Inflation Rate: Indices The inflation rate can be calculated for different price indices. For the national inflation rate, the consumer price index (CPI) is considered. This index measures the actual prices of goods and services needed by the common man. The inflation rate can also be measured by the following indices:  Cost-of-living index (COLI): This is used to adjust income scales so that the real value of earnings remains the same.

Producer price index (earlier Wholesale Price Index): This measures the

average change in prices that domestic producers receive for their products. This index measures the growing pressure on producers due to changes in the costs of their raw materials. This pressure might get passed on to consumers, absorbed by profits or offset by a rise in productivity.  Commodity price index: This measures the prices of a selected group of commodities.  Core price index: This removes the volatile components (primarily food and oil) from broader indices, like the CPI. Short term changes in demand and supply conditions do not significantly affect such indices. Central banks use it to assess the need for adjusting the monetary policy.

26

Methods of Calculating the Inflation Rate
The two main methods used to calculate the inflation rate are:  Base period: This method is the more common of the two and assigns a

relative weight to each element while making calculations.
 Chained measurements: In this method, the contents of the ‘commodity

bundle’ are adjusted, along with the prices. Besides, individual time periods in which the price levels fluctuate are also taken into account. Any undesired change in the rate of inflation can affect the economy and national development at large. The appropriate estimation of inflation rates is necessary to get an overview of the national economy.

Inflation Rate: The Formula The equation to calculate the inflation rate is: Inflation Rate = (Po- P-1)* 100 / P-1, where Po = the present average price P-1 = the price that existed last year. The inflation rate is always stated as a percentage. Another way of calculating the inflation rate is to apply the log rule. The inflation rate is important, since it is subtracted from various economic rates in order to eliminate the impact of inflation. The real increase in wages is also counted by taking into account the prevailing inflation rate.

27

Current Inflation, Current Inflation Rate
The current inflation rates across the world, as of April 2009, were low due to the global recession that peaked in September 2008. The recessionary pressures felt across the globe resulted in a massive decline in the supply of money. This, in turn, affected commodity prices, resulted in low inflation rates. Current inflation is measured by the International Monetary Fund.

Current Inflation Trends in the World
According to an IMF report, headline inflation in the developed nations is expected to decline from 3.5% in 2008 to a record low of 0.25% in 2009. It is expected to recover to 0.75% in 2010. In the emerging economies, inflation is expected to fall to 5.75% in 2009 and 5% in 2010, from 9.5% in 2008. For the quarter ended March 31, 2009, the current inflation rates of major nations are listed in the table given below:
Countries New Zealand UK Australia EU Japan US Current (%) 3 2.9 2.5 0.6 -0.3 -0.4 Inflation

Calculation of Current Inflation Rates
Current inflation rates are calculated for different timeframes – from as short a period as a week to as long as a year. Short-term inflation rates facilitate the analysis of the sudden effects of economic, political and social changes on

28

current inflation. Long-term rates are a better measure, as they reflect the economic situation in a more comprehensive way by rounding off the effects of sudden price movements. The current inflation rates released by the IMF and various national governmental bodies are calculated on an annual basis. The weekly and monthly figures announced by these organizations are annualized figures. Current Inflation and Unemployment According to an ILO report, the world unemployment rate is projected to reach 7.1% in 2009 if the sluggish economic performance continues. This is estimated to increase worldwide unemployment by 50 million. According to the Bureau of Labor Statistics, 651,000 jobs were lost in February 2009 in the US alone. The IMF has projected world economic growth at 0.5% for 2009, a record low since World War II. However, given the constant efforts to ease credit strains by implementing expansionary fiscal and monetary policies, the world economy is expected to recover by 2010. Core Inflation, Core Inflation Rate Core inflation is a measure of inflation that excludes items such as food products and energy, which are prone to volatile price movements. The concept of core inflation rate was introduced by Robert J. Gordon in 1975.

Significance of Core Inflation
Core inflation is an indicator of long-term inflation at a fundamental level. It is considered while framing monetary policies, as it supports the primary goal of central banks – price stability along with sustainable economic output and employment. Core inflation does not consider products that are easily influenced by supply shocks. This is because such items can move away from the overall inflation trend and represent a false picture.

29

Measuring Core Inflation
Core inflation is calculated in various ways: 1. Outliers method: This excludes products that have the largest price changes. 2. Statistical methods: These include trimmed mean and weighted mean. These methods are derived from a highest-to-lowest ranking of individual price changes for each given month. 3. Consumer Price Index (CPI): This measures inflation and excludes the prices of volatile products such as food and energy.

Monitoring the Core Inflation Rate
In an economy facing inflationary pressure, the central bank typically aims at controlling the core inflation rate, as this is easier to control

CONCLUSION:We should have some insight into inflation and its effects. For starters, you now know that inflation isn't intrinsically good or bad. Like so many things in life, the impact of inflation depends on your personal situation. Some points to remember: 30

Inflation is a sustained increase in the general level of prices for goods and services. When inflation goes up, there is a decline in the purchasing power of money. Variations on inflation include deflation, hyperinflation and stagflation. Two theories as to the cause of inflation are demand-pull inflation and cost-push inflation. When there is unanticipated inflation, creditors lose, people on a fixedincome lose, "menu costs" go up, uncertainty reduces spending and exporters aren't as competitive.

• •

• • •

Lack of inflation (or deflation) is not necessarily a good thing. Inflation is measured with a price index. The two main groups of price indexes that measure inflation are the Consumer Price Index and the Producer Price Indexes. Interest rates are decided in the U.S. by the Federal Reserve. Inflation plays a large role in the Fed's decisions regarding interest rates. In the long term, stocks are good protection against inflation. Inflation is a serious problem for fixed income investors. It's important to understand the difference between nominal interest rates and real interest rates.

• •

Inflation-indexed securities offer protection against inflation but offer low returns.

Bibliography

www.inflation.com www.statistic.gov.my www.wikipedia.org/wiki/Inflation Magazine & Newspapers : The Star Online Book : Principles of Economics/Deviga Vengedasalam, Karunagaran, 2nd ed. 31

32

Sign up to vote on this title
UsefulNot useful