CME-BAA MACROECONOMIC OBSERVATORY (MEO): INFLATION DEVELOPMENTS HAVE TO BE CLOSELY MONITORED
Friday, 26 March 2021: Malaysia’s headline inflation returned to positive in February 2021 at 0.1% year-on-year (YoY) after 12 months of being in the negative territory.
The CME-BAA Macroeconomic Observatory (MEO), a joint platform promoted by the Center for Market Education and Bait Al-Amanah, observes that, despite being a very small increase and despite inflation is predicted to remain within 3% in 2020, Bank Negara and policy makers should keep such a trend under close observation.
Dr Carmelo Ferlito, CEO of the Center for Market Education, observed that “this is the first showing up of a trend that has been visible for the price of input materials for 9 months now”.
“While overall prices are still kept down by the economic crisis we are experiencing – continued Dr Ferlito – four elements are pushing in the opposite direction, which means toward price increases: supply chain shocks and disruptions, temporarily extended expansive fiscal policies, quantitative easing (low interest rates) and the first signs of economic recovery; without expansive monetary and fiscal policies, prices would be lower, which means that purchasing power would be more easily restored, leading the economy toward a more sustainable path”.
The Macroeconomic Observatory explains that input material prices always anticipate the more general inflation trend, and therefore we must be prepared with an adequate strategy to avoid the emergence of rampant consumer prices, which would compromise the sustainability of the recovery path.
Abel Benjamin Lim, an economist at Bait Al-Amanah, added that “such emergent inflation pressures indicate that expansive fiscal and monetary policies always come at a cost. In particular, fiscal injections were made necessary by the lockdown effects, while a more targeted approach toward virus containment could have led toward and inferior need for fiscal interventions. It will become soon evident that we need to further intervene in order to counteract the effects created by a certain policy (fiscal stimuli) which in turn were made necessary by another policy (MCO)”.
In conclusion, the Macroeconomic Observatory invites the government to abandon a “hole-and-patch” approach to economic problems and to implement a more holistic strategy, based on a sound trade-off analysis.
With specific reference to the emergent inflationary pressures, the Macroeconomic Observatory suggests the following measures:
- Avoid further combinations of lockdowns and fiscal packages, in order to minimize the future need for economic support.
- Focus on targeted approach aiming to protect vulnerable communities.
- Implement an “inflation observation group” in order to monitor, interpret and tackle future developments.
- Move from an aid-based policy toward a more comprehensive strategy to boost confidence so that to bring Malaysia on a sustainable recovery path, rather than on a path mainly led by government support.
- Revise the fiscal stimuli in place in order to understand what in this moment is really necessary and what should be abandoned, so to shift toward targeted programs.
From the monetary policy perspective, MEO invites Bank Negara to remain prudent and to avoid further monetary easing.
About CME: The Center for Market Education (CME) is a boutique think-tank based in Kuala Lumpur, Malaysia. As an academic and educational institution, CME aims to promote a more pluralistic and multidisciplinary approach to economics and to spread the knowledge of a sounder economics, grounded in the understanding of market forces. In order to do so, CME is not only involved in academic initiatives, but it organizes seminars, webinars and tailor-made economics classes for students, journalists, businesspeople and professionals who wish to better understand the relevance of economics for their daily lives and activities. Economics matters and needs to be presented in a fashion in which the link with reality is clearly visible. In this sense, we look not only at theoretical economics but also at policy making, with an emphasis on the unintended consequences generated by political actions.