Inflation —wrong diagnosis leads to adverse impacts


There have been many comments and criticisms of our newly-appointed Minister of Economy Mohd Rafizibin Ramli and his rationale to regulate rising prices. This Economic Affairs Minister suggested consumers to cut down on buying chicken in order to lower prices. His comment was countered today by Centre for Market Education’s (CME) CEO, Carmelo Ferlito. He stated that our current rise in inflation is, in actuality, caused by Malaysia’s expansive fiscal and monetary policies that were introduced to cushion the economic impact of the COVID-19 pandemic to which RM305 billion (23% of GDP) in 2020 and RM225 billion (15% of GDP) in 2021 were allocated for that purpose.

Both diagnoses of the root of the problem are common perspectives shared by bourgeois economists and policymakers in which their conclusions fall into one of two camps. It’s either — (1) Inflation is caused by excess money in circulation (citing the government’s stimulus assistance to the Rakyat) or — (2) Inflation is a result of excess demand in the economy when consumers continue to buy even when prices are high.

According to Rafizi Ramli, the price pendulum should have worked as Adam Smith envisioned — when demand increases, prices of goods will rise, creating an attractive profit margin. That will inspire more producers to jump into the bandwagon and start producing (supplying) those particular goods until its sale exceeds demand, then prices will begin to fall. Prices in an ideal market system are supposed to gravitate to a natural price, but this rarely happens in a real market place filled with monopoly and hoarding activity.

We have to take note that the inflation throughout the year 2022 has been a worldwide phenomenon, as we have witnessed happening in Europe and the United States. Thus, causes of inflation can’t be concluded in a simplistic manner. It requires inclusion of multiple factors.

The shock of the pandemic caused significant increase in prices across the board, when cross border logistics were disrupted and global supply chains failed. The capitalist production system was not built to endure such shocks like pandemics and climate change. Post-lockdown, prices of food products increased instantly.

Without a doubt, this was also caused by ‘pent up demand’, where purchases for services and goods that were put on hold during the lockdown are being spent now, causing a rise in demand within a short period. Many food loving Malaysians had started enjoying eating out again, after they were forced to remain indoors during the two years of multiple lockdowns. Thus, both increase in production input cost and the sudden increase in demand would have caused the current spike in food prices.

Reverting back to Rafizi’s and CME’s diagnosis, I argue that their simplistic conclusions would eventually lead to an adverse impact on the Rakyat. The Rakyat, especially the B40, simply cannot change their diet overnight. Chicken is commonly known to be a cheap source of protein compared to fish. With climate change and the resulting reduction in fish stock, a meal with fish in it is a luxury — not just for the lower-income, but also for middle-income families.

It’s easy to advise people that they should look for alternative sources, but the truth of the matter is, communities are too coerced and reliant on purchasing the choices that are readily available to them at the nearest accessible markets or grocery stores. If the market offers no other viable choices, they will buy the easily available chicken meat in order to provide a balance diet for their children. With no increase in real wages, they are then forced to tighten their belt further on other important expenses like healthcare or housing in order to put food on the table for their dependents. Haven’t we heard enough reports of the deplorable state of the working people’s financial affairs, such as lack of savings for emergencies and overburdening debt?

Carmelo Ferlito’s conclusion too will tend to suggest that in order to reduce money circulation in the market, the government needs to cut back on its cash hand-outs to needy families, and maybe also put a brake on the minimum wage increase. The simplistic view is that when people have less money to spend, there will be less money chasing after goods and it will reduce aggregate demand and curb inflation. This, too, will be a disastrous move on lower-income families, inevitably pushing them further into poverty.

Thus, it is important that the government looks at a holistic solution and not quick fixes. In order to ensure that the Rakyat is guaranteed a healthy diet, food products need to be readily affordable. We need to seriously enhance our local self-sufficiency and not rely on food imports that are vulnerable to price fluctuations during pandemics, wars (Ukraine) and climate disasters. Wages need to be increased and not curtailed to spur local economy, as working people are consumers that stimulate the local economy — unlike billionaires, who invest on financial speculative instruments for their own wealth accumulation.

Our workers’ share of the GDP (compensation) is only 34.8% of our nominal GDP for the year 2021, confirming that we are still underpaid for the value we create for the economy. Anwar’s cabinet has to work in coherence with each Ministry, complementing each other, to achieve their goals. Inflation management, price controls, food sovereignty and poverty eradication mission has to be synchronized towards a common program to ultimately uplift the Rakyat’s well-being.

Sivarajan A
Parti Sosialis Malaysia


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