KOTA KINABALU, March 1 ― Malaysia is in a state of disinflation and not deflation contrary to reports stating otherwise, says economist James Alin from University Malaysia Sabah (UMS).
The UMS School of Business and Economics lecturer said that the consumer price index (CPI), an indicator for inflation, has decreased but not gone into the negative as of January, 2019.
“So actually we are not in deflation yet ― just disinflation. The last time the country was in deflation was four years ago,” he said.
He argues though that deflation has some positives.
“Decreases in consumer prices index can be a good thing in the short run because prices of goods and services we consume daily are falling.
“In other words, our disposable income increases. Prices going up and down is an indication that the markets mechanism is working rather well,” he said.
However, he also contended that the change in prices will not affect the average consumer by much.
“Actually 45 per cent of goods listed are non-durable and perishable items, one can buy more when it is cheaper but is it possible to stock? Most of those are once-in-a-while purchase. You don’t buy clothing every day just because it’s cheaper, unless you are rich and addicted to shopping.
“As an individual, they can only consume roughly the same amount of these items categorised in the CPI whether it is more expensive or cheaper,” he said naming things like food, furniture, water consumption, and property.
“So changes are minimal in impact for consumers. For high-end consumers, it may be of more impact,” he said.
Alin said that the negative aspect of deflation is when the CPI hits and remains at negative rates over a long period of time... low prices of goods and services may cause small- and medium-size firms (companies or producers) to go out of business.
“This is where the impact will be felt. If a person is selling things at low prices, he may not be able to sustain the business, and this will result in laying off employees or shutting down.
“Prolonged deflation results in impending recession ― when economic growth is zero or negative for two consecutive quarters of a year – and deflation will have worse effects compared to inflation because interest rates can only be lowered to zero,” he said.
“So it is a fine balance ― too high prices and people suffer, too low and companies and employees suffer. It’s a tough balance,” he said.
Malaysian Institute of Economic Research (MIER) executive director Zakariah Abdul Rashid said that current price deflation should not be construed as recession yet but the deflation was to a certain extent a manifestation of weakening demand and slowing down labour productivity growth.
“The faster rise in wage growth over that of labour productivity recently seems to not exert any inflationary pressure at all. On the contrary, the current price deflation signifies prevalence of ample room for further wage increase in order to stimulate private consumption expenditure, thus simultaneously addressing the cost of living problem,” he said.
“When the prices of goods and services fall and remain at zero rates, firms are no longer able to cover the costs of production, what more to profit. Their employees would lose their jobs, with it their purchasing power.”
When asked whether there was a link between the Sales and Services tax and the deflation, Alin said although they were not related, eliminating or reducing tax rates would help to a certain extent by helping the economy recover faster.
“In general both have been and is burdensome to Malaysians and not productive and definitely killing the efficiency of economy,” he said.
However, Alin said that Malaysians for now need not be too concerned as the country has been through deflation before and will emerge stronger.
He said Peninsular Malaysia experienced deflation for the first time in 1958 which lasted until 1961 and it happened again two years after the formation of Malaysia, in 1968 to 1969.
“I think we are heading to a better future. It’s hard to predict how long it will last ― maybe one or two years, we don’t know ― but from the viewpoint of the new administration, it will continue to lower, but not to zero.
“Similar to our past experience, recent deflation was the result of either or both prudent fiscal policy and contractionary monetary policy because the new administration wanted to reduce the huge deficits. It is shock therapy; a temporary, painful process Malaysia’s economy already had some experience in,” he said.
Zakaria concurred that the current fiscal and monetary limitations may be a good time to implement new policies.
“Perhaps now is the right time to consider employing income and price policy given the current macro-economic conditions,” he said.
Following reports of the deflation, the federal government has tried to dispel any fear after the 0.7 per cent year-on-year decline in the January 2019 CPI for the first time in 10 years.
Finance Minister Lim Guan Eng said this was supported by Malaysia’s strong economic growth numbers, with the economy expanding by 4.7 per cent in 2018 and likely to reach 4.9 per cent this year.
He said the January CPI decline was not the result of any weakening in consumer demand. Instead, it was largely caused by supply factors in the form of cheaper input costs, specifically cheaper fuel, he said.
