By Center for Market Education

KUALA LUMPUR, Malaysia--Serious concerns are emerging in Malaysia about rising prices of basic food items such as chicken and vegetables, which are expected to remain high into next year.

The Center for Market Education (CME) started to ring the alarm bell on inflation last March and repeated the warning just before
the tabling of Budget 2022.

CME also discussed the possibility of a post-COVID inflationary economic crisis in the following publications:

- The post-COVID economic crisis (May 2021):

- Inflation, Unemployment and COVID-19 Policies: Where Is the Malaysian Economy Heading? (August 2021)

- The cause of inflation, its link to unemployment and the need for sound monetary control (November 2021).

What is happening in Malaysia cannot be analyzed outside of the context of mounting inflation around the world, where countries such as Germany and the United States are recording the highest inflation in decades.

Dr Carmelo Ferlito, CEO of the Center for Market Education, explained that “we have to distinguish two main components in these new inflationary trends:

1. The effects of supply-side shocks generated by lockdowns are now exacerbated by rising demand due to the economic recovery, especially in the West.

2. A money supply growing faster than the output, due to expansive fiscal and monetary policies implemented to face the effects of lockdown policies”.

In this regard, Dr Ferlito added that “while the nature of the first type of inflationary pressure can be temporary, the effects of the second type will remain with us for long”.

According to CME, price ceilings are not the way to go in order to address inflationary pressures.

They will only make the situation worse, by creating less incentive to produce and therefore diminishing supply and keeping the inflationary tendencies high, impeding that re-adjustment of the supply which is very much needed to bring the economy back on track.

The Center for Market Education, instead, suggests the following measures to address inflationary pressures:

1. Monetary inflation (excess of money supply).

Nothing much can be done in the short run to tackle this component of inflation, which is the most serious and threatening one.

To raise interest rates now will only make things worse, as we need investments and confidence to rebalance the supply chain.

The only way to face this is for governments worldwide to embark in gradual, and yet painful, programs of spending cuts.

2. Supply-side shocks.

It is important to recognize that two years of lockdowns forced many businesses to scale down their operations (when they did not cease operations completely).

While it is easy and fast to scale down (or to cease operations), it requires much more time to scale up again, a process which needs not only financial resources but first and foremost confidence in the future, a trust that new investments will not be frustrated by new lockdowns.

These are some of the implementable measures:

- A stronger communication on no-lockdown commitment, paired with investments in ICUs beds (which seems to be the critical element in lockdown decisions).

- Re-open the market to foreign workers, to ease the labour shortage very much felt in the Food and Beverage industry, but also in tourism, manufacturing and agriculture.

- Implement free-trade agreements and special commercial corridors to ensure that Malaysia has access to the supply of those products which are now in shortage and that contribute to push up agriculture prices (it is the case, in example, of chicken feed).

“In a nutshell, it is clear that what we need is, again, less government intervention and more trust in market forces, rediscovering the importance of confidence, expectations, labour mobility and international trade," concluded Dr Ferlito.