More investments needed to ensure stable prices in long term: Economist
04 Jan 2023
Malaysia’s inflation may have peaked in line with the trend seen in the United States and the United Kingdom although prices will remain elevated.
Bank Islam Malaysia Bhd chief economist Firdaos Rosli said the government needs more investments in key inflation items such as housing, food, transport and energy so that prices can be more stable over a longer time horizon.
“Lowering house prices is quite complex as it involves varying stakeholders, but not the other three main items. The increasing application of environmental, social and governance (ESG) standards helps, but it cannot be the sole channel for technological upgrading,” he added.
Firdaos said the country’s inflation would likely come down in the coming months of 2023 in line with the moderating inflation rate seen in the US and the UK though taming it is far from over.
According to him, Malaysia’s Overnight Policy Rate (OPR) would probably rise closer to its pre-Covid levels in 2023 amid the widening policy rate and yield gaps.
Economists in general are of the view that Bank Negara Malaysia would raise the OPR by another 50 basis points to 3.25% this year amid expectation that inflationary pressure would ease.
Firdaos said policymakers assess inflation from the price level and surveys.
“Economists believe that inflation counteracts unemployment and correlates with policy rates. In simple terms, when inflation is high, unemployment is low and the policy rate tends to increase.
“The reverse relationship also holds; hence, demand-pull and cost-push as the two common types of inflation,” he said, noting that governments monitor prices more closely than they do incomes.
He shared that the recent global inflation is a combination of the two phenomena. Demand-pull happened amid rapid post-pandemic labour market recovery, whereas cost-push resulted from high energy prices, which took place almost overnight due to the military conflict.
The unfavourable foreign exchange terms amid the strengthening US dollar have made it worse for all but the US and, to a certain extent, Hong Kong and Singapore. All eyes are on central banks to intervene whenever inflation becomes a national issue.
“We often overlook the role of fiscal policy in taming inflation, if any. One reason is that fiscal policy appears to be more ‘restrictive’ than monetary policy, more so when governments are out of ammunition to counterbalance the deleterious effects of the pandemic.
“Another reason is that, unlike the interest rate, policymaking is extremely complex when assessing the wages/incomes perspective as it differs from one economic centre to another.
“Lowering taxes is problematic as tax foregone could attract more problems when the labour market is tight and may even affect the core functions of the government as revenues fall. On the contrary, raising taxes to stifle demand growth is inopportune, so we can safely discard that,” Firdaos said.
He said the natural thing to do is to expect monetary policy to tame inflation via demand-side intervention.