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Inflation Essay

1452 words - 6 pages

Introduction and Definition

Inflation is a phenomenon which happens world wide. It causes many problems to countries all over the world. Inflation is the rise in the general level of prices. When inflation occurs, each ringgit of income will buy fewer goods and services than before. Inflation will reduce the "purchasing power" of money. However, not all prices rise during inflation. There are some prices which are relatively constant while some prices are decreasing.

There are two types of inflation. The first type is called the demand-pull inflation. This type of inflation usually happens when there are changes in the price level that are caused by an excess of ...view middle of the document...

90 |3.70 |3.50 |3.00 |2.40 |-1.40 |-2.40 |-2.40 |-2.00 |-1.50 |-0.10 |1.10 | |2008 |2.30 |2.70 |2.80 |3.00 |3.80 |7.70 |8.50 |8.50 |8.20 |7.60 |5.70 |4.40 | |
Based on the above table, it is clearly stated that Malaysia experienced its worst inflation rate in the year 2008. Inflation rate starts to increase in June 2008 till December 2008. In 2009, the rate of inflation starts to decrease and in July 2008 till December 2008, deflation happens.

The main reason inflation happen in 2008 is due to the rise in the world crude oil price. The increase in crude oil price causes the increase in country gas price. Current price of crude oil has increased to USD 150 per barrel which causes Malaysia to face a 7.7% inflation in June 2008 and a 8.5% inflation in July 2008. The rise of the natural resources price has increased the price of local gas from RM1.92 per liter to RM2.70 per liter. The increased in the price of local gas has caused the price local goods such as cooking oil to rise in that year. The local traders took the advantage to increase the price of goods due to the rise in crude oil price.

The inflation in Malaysia also happens due to the increase in government servant's salary and wages as well as the new Cost Of Living Allowances(COLA) announcement made by the government. The announcement has made the public as well as the local traders happy. A few days after the announcement was made, various types of necessary goods prices increase. This is done by the local retailer and shop owner in order to gain profit from the situation. The inappropriate act by the local trader acts as a stepping stone for Malaysia's inflation to grow. Even though the government has came out with many types of control methods to decrease the price of goods but local traders had worsen the situation by hiding the goods in order increase the price again.
Government action to face the inflation

Malaysian government applied various strategies to face the inflation that occured in Malaysia recently. As a central bank, Bank Negara Malaysia(BNM) act as government agent to control the economy by implementing several policies to the commercial banks and the financial institutions. They also give advices to public on how to help the government to control the inflation rate in Malaysia.

Monetary policies

Monetary policies are policies used to manipulate the money supply in order to maintain the stability of the market. Instruments used in monetary policies are open market operation, statutory reserve requirement, discount rate.

First instrument is the open market operation. Open market operation influences the money supply in an economy directly. It act as an instrument to reduce or increase commercial bank money supply by selling or buying securities. When inflation rate was high, BNM requested commercial banks and financial institutions to buy securities to reduce their money supply and thus, decrease the capability to...

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