1.

0 Introduction

According to public understanding, inflation is a condition which produces a

rising trend in the general price level in the economy. The relationship also can be
understand as too much money chasing too few goods. Definition for inflation is the
percentage change in the value of the consumer price index (CPI) on a year-on-year
basis. (The Economic Times)

To measure the inflation, CPI is needed. The CPI measures changes in the
prices paid by consumers for a basket of goods and services. (Trading Economics)
The formula below shows how the inflation rate is calculated.

CPI this year CPI previous year

Inflation rate 100
CPI previous year

Graph 1 shows the evolution of Consumer Price Index (CPI) monthly in

Malaysia in the last 3 years, which is 2011 to 2013. Form the graph 1, we can see the
Malaysia CPI is increase moderately. It shows that expenditure of the average
household in Malaysia is increasing and will prove by graph 2.

Malaysia Consumer Price Index (CPI)

110

108.9
108 108.6
108.3
107.9
106.9107
106.7
106 106.6
106.3
106.2
106.1
105.9 CPI 2011
105.5
105.4 105.5
105105.2 CPI 2012
104 104.8
104.7 104.8
104.5
104.5
104.5
104.5 CPI 2013
Price index 104.2
104.1
103.8104
103.6
103.4
103.2
102.9
102 102.6
102.4
102.3
101.8

100

98

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Graph 1: Malaysia Consumer Price Index
Source from: http://www.tradingeconomics.com | Department of Statistic Malaysia
Graph 2 illustrates the consumer spending quarterly in Malaysia in the last 3
years, which is 2011 to 2013. It shows that consumer in Malaysia average spending
is increase moderately implying the general price level is increasing in the last 3
years.

Graph 2: Malaysia Consumer Spending

Source from: http://www.tradingeconomics.com | Department of Statistic Malaysia

By using the CPI statistic from graph 1, we can compute the inflation rate in
2012 and 2013, which are shows in graph 3. From the graph 3, we can see the trend
of inflation rate in 2012 and 2013, which are downward sloping in 2012 and upward
sloping in 2013. Fall in inflation rate is not same thing to fall in prices. Although there
was a downward trend from 2.7% to 1.2% in 2012, but the rate is remained positive
implying prices were rising but at a slower rate. If fall in prices, there will be a
deflation, which is the number is negative.

Malaysia Inflation Rate

3.5
3.0
2.5
INFLATION 2012
2.0
INFLATION 2013
1.5
1.0
0.5
0.0

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Graph 2: Malaysia Inflation Rate
Source from: http://www.tradingeconomics.com | Department of Statistic Malaysia
Salary growth in Malaysia. According to 2013 Hays Asia Salary Guide,
employees in Malaysia can expect salary increases in 2013. In 2012, Malaysia 43%
of employers increased salaries by 3 to 6% and 29% of employers salaries rose
above 6% while 14% of employers are increased above 10%. At the same time, 14%
of employers gave raises less than 3%.

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2.0 The causes of inflation

Inflation can be come from supply and demand side of an economy. Inflation
that comes from supply side is known as cost push inflation and demand side is
known as demand pull inflation.

2.1 Cost Push Inflation

Cost push inflation refers to an increase in the general price level associated
with an increase in the cost of production. (Deviga.V & Karunagaran.M, 2010) This
type of inflation is the result of the sellers activities. State in terms of AD and AS
function, the inflation occurs due to some factors which shift the AS to the left as
shown in graph 4. Several factors can result the shift in AS, we focus on two factors.
There are energy prices and minimum wage policy.

Graph 4: Cost Push Inflation

The increases of energy prices will result the inflation. In real practical, petrol
and electricity are the energy that will affect the economy and lead to the shift in AS.
The increases of energy price will lead to an increase in prices of consumer
commodity. When the price level increase, the inflation is occur. The reason energy
price rise is because subsidy cuts introduced by government in 2013, which lead to
10% rise in petrol prices and 15% in electricity. (Trading Economics) Furthermore,
according to The Global Energy Outlook, it will has 70% of energy consumption
growth over the next 25 years will be in the east, which are Asia and Middle East due
to population growth and energy intensity of economic structure increase. Therefore,
the energy price is expected increases and it will lead to an increase in production
costs and eventually an increase in the price of output that shown in graph 4.
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 Another factor is minimum wage policy. A minimum wage is the lowest hourly
or monthly remuneration that employers may legally pay to the workers. The policy is
attempts to protect employees from exploitation, allowing them to afford the basic
necessities of life. (Bank Negara Malaysia, 2013) An increase in the wage level will
lead to an increase in the cost of production and the output price. In 2013, Malaysia
implemented the minimum wage policy and it result to an increase in marginal
propensity to consume. It will leads to CPI increase as shown in graph 1 and
eventually an increase in inflation rate as shown in graph 3.

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 2.2 Demand Pull Inflation

Demand pull inflation occur when demand for a good and service increases,
but supply is remain same. The relationship can be translated into the AD exceeds
AS. The rise in AD may due to consumer demand increase, investment by firms or
consumers increase, rise in government spending, or increase in net export. As a
result, AD curve will shift to the right as shown in graph 5. The essence of demand
pull inflation is too much money chasing too few goods.

Graph 5: Demand Pull Inflation

Firstly, rise in consumer demand. According to 2013 Hays Asia Salary Guide,
employees in Malaysia can expect salary increases in 2013. The rise in salary will
result the marginal propensity consume (MPC) increase. When MPC increase, the
consumer spending will increase that shown in graph 2, as a result the spending pull
the price level upward. It will lead to CPI increase, and eventually inflation rate
increase. As a result, demand pull inflation occurs.

Secondly, rise in investment by firms or consumers. A fall in interest rate will

stimulate the demand. For example, demand for loans increasing. According to
Trading Economic, the Malaysia interest rate is remained at 3% from July 2011 to
2013 as shown in graph 6. For consumers, the unchanged interest rate will lead to
demand for loans increasing for investment and leading to house price inflation. For
firms, the unchanged interest rate will lead to demand for loans increasing to expand
more projects to generate more profit. As a result, demand pull inflation occurs.

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Graph 6: Malaysia Interest Rate
Source from: http://www.tradingeconomics.com | Department of Statistic Malaysia

Thirdly, higher demand from a fiscal stimulus like government spending

increase. According to Trading Economic, the Malaysia government spending is
increasing from 2011 to 2013 as shown as graph 7. The increasing of government
spending will stimulate the economy and it will lead to AD increase, and eventually
will pull the price level upward. As a result, demand pull inflation occurs.

Graph 7: Malaysia Government Spending

Source from: http://www.tradingeconomics.com | Department of Statistic Malaysia

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 Lastly, rise in net export or known as balance of trade. Fluctuations in
exchange rate can affect inflation. For example, a depreciation of the exchange rate
will increase the price of imports and reduces the price of exports. Form the statistic
by Trading Economics, we can see that the balance of trade is closely related to the
currency as shown in graph 8. In graph 8, line A shows there is an increase in
currency and followed by the increase in balance of trade; and line B shows there is
a decrease in currency and the balance of trade also followed to decrease. When
consumers buy less import, while export grows, AD will increase and pulls the price
level upward. As a result, demand pull inflation occurs.

Graph 8: Comparison of Malaysia Dollar and Malaysia Balance of Trade

Source from: http://www.tradingeconomics.com | Department of Statistic Malaysia

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3.0 The impacts on Consumer Living Pattern

Inflation will affect the consumers real disposable personal income and
expenditure pattern due to the money value is depreciated and lesser goods can be
purchased. The impact on consumer living pattern can be investment, energy
expenditure, and food and clothing.

One of the impacts from inflation on consumer living pattern is investment.

Consumer can get benefit from inflation on assets such as housing, if they own the
assets before the level of price increase. During inflation, the value of money and
fixed deposits will depreciate in terms of real income. Since the inflation depreciate
the value of fixed deposit, consumer will save less and invest more in assets such as
housing and land. However, consumer also will get hurt from the assets inflation. For
example, assets bubble. When the bubble inevitably bursts, those who hold on
overvalued assets usually will experience a loss due to they cant sell out the assets
at the price that they buy.

Another impact that can change the consumer living pattern is energy
expenditure. In here, the energy is electricity and fuel. Energy price increase will lead
to inflation. Take fuel as example. When there is an increase on price of fuel, those
who driving to work will expend more on fuel, and eventually energy expenditure will
increase. People may choose public transportation as their transport or share the car
with co-worker to their working place to save more cost. Another example is
electricity. When there is an increase on electricity price, it will pressure more on
consumer in electricity bills, and eventually energy expenditure will increase. People
may reduce the usage of electricity in order to reduce the expenditure.

Lastly, an impact on consumer living pattern is food and clothing. During

inflation, the general level of prices rises and lead to consumer behaviour change.
Consumer is more easily attracted by advertising or promotion to satisfy their want
with the least money. For example, clothing. Before inflation, consumer may use
brand or quality as their standard to buy clothing, but after inflation, consumer may
use price or brand as their standard. Therefore, consumer is easily more attracted by
promotion like buy one free one. Another example is food. Before inflation, consumer
may use taste as their standard to buy food, but after inflation, consumer may use
quantity as their standard. The reason why the standard changing is because

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consumer purchasing power is reduce and they still tend to use the same amount of
money to satisfy their wants.

4.0 Conclusion

In November 2013, Malaysia interest rate is recorded as 2.9%, the highest

rate since November 2011. The inflation rate is reflecting higher petrol cost after the
government cut fuel subsidies in September 2013. (Trading Economics)

Actually, government quite like the inflation- in moderation. Inflation may

depreciate the currency a little bit, but it can be balance by a lot of money that
coming into the system: money to spend, or invest, or build, or hire more staff. The
relationship can be translated as when people spend more, the business will gain
more profit, and eventually the business will hire more staff to maintain the profit.
Therefore, inflation in moderation has a positive effect to economic growth due to can
help people employed.

Take impact on consumer living pattern- food and clothing as example of

economic growth. Inflation will raise the general price level and consumer will more
attracted by the promotion. When people spend more in promotion time like buy one
free one or discount on food, the business will gain more profit due to the business
sell more items, and eventually the business will hire more staff to keep their
business go well. As a result, unemployment rate reduce.

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5.0 Reference

1. Newell, Richard G. and Stuart Iler, "The Global Energy Outlook", NBER
Working Paper No. 18967, April 2013
2. Department of Statistics Malaysia (2013), Consumer Price Index Malaysia
November 2013, retrieved from: http://www.statistics.gov.my/portal/index.php?
option=com_content&view=article&id=2194%3Aconsumer-price-index-
malaysia-november-2013-updated-18122013&catid=71%3Aconsumer-price-
index-malaysia-&Itemid=153&lang=en
3. Trading Economics, Malaysia Statistic, retrieved from:
http://www.tradingeconomics.com/
4. Economic Times, Definition of 'Inflation', retrieved from:
http://economictimes.indiatimes.com/definition/inflation
5. Kimberly Amadeo, What Is Inflation, retrieved from:
http://useconomy.about.com/od/pricing/f/Inflation.htm
6. Geoff Riley (2012), Inflation, retrieved from:
http://tutor2u.net/economics/revision-notes/as-macro-inflation.html
7. Hays, Hays Asia Salary Guide (2013), retrieved from:
http://www.hays.com.my/press-releases/HAYS_094184
8. Fred Kaifosh (2013), Why The Consumer Price Index Is Controversial,
retrieved from:
http://www.investopedia.com/articles/07/consumerpriceindex.asp
9. Could a Raise in Minimum Wage Trigger Inflation (2013), retrieved from:
http://inflationdata.com/articles/2013/03/03/raise-minimum-wage-trigger-
inflation/
10. Rupa Damodaran (2012), Minimum wage policy may impact inflation, retrieved
from:
http://www.btimes.com.my/Current_News/BTIMES/articles/rup14ab/Article/ind
ex_html
11. Bank Negara Malaysia (2013), Potential Impact of the Minimum Wage Policy
on the Malaysian Economy, retrieved from:
http://minimumwages.mohr.gov.my/wp-content/uploads/2013/07/Box-from-
BNM-Annual-Report.pdf
12. Deviga Vengedasalam & Karunagaran Madhavan, Principle of Economics (2 nd
edition,2010), Publisher: Oxford Fajar Sdn. Bhd.
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edition, 2008), Publisher: Pearson education, Inc
14. Grame Chamberlin & Linda Yueh, Macroeconomics (2006), Publisher:
Thomson Learning

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