CME: WHAT TO DO WITH RISING PRICES
WEDNESDAY, 24 November 2021: Serious concerns are emerging in Malaysia about rising prices of basic food items such as chicken (https://www.freemalaysiatoday.com/category/nation/2021/11/22/act-on-all-time-high-prices-of-chicken-and-eggs-says-najib/) and vegetables (https://www.freemalaysiatoday.com/category/nation/2021/11/23/consumer-group-wants-govt-to-act-on-rising-veggie-prices/ and https://www.freemalaysiatoday.com/category/nation/2021/11/24/vegetable-prices-to-stay-high-until-after-cny/).
The Center for Market Education (CME) started to ring the alarm bell on inflation last March (https://marketedu.org/media-statement/cme-baa-macroeconomic-observatory-meo-inflation-developments-have-to-be-closely-monitored) and repeated the warning just before the tabling of Budget 2022 (https://marketedu.org/media-statement/cme-do-not-ignore-inflation-when-preparing-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): https://www.themalaysianinsight.com/s/314664.
- Inflation, Unemployment and COVID-19 Policies: Where Is the Malaysian Economy Heading? (August 2021): https://bit.ly/PPCMENo3.
- The cause of inflation, its link to unemployment and the need for sound monetary control (November 2021): https://blanq.link/EduPaper8.
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:
- The effects of supply-side shocks generated by lockdowns now exacerbated by rising demand due to the economic recovery, especially in the West.
- A money supply growing faster than the output, due to expansive fiscal and monetary policies implemented to face the effects of lockdown policies”.
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 readjustment of the supply which is very much needed to bring back the economy on track.
The Center for Market Education, instead, suggests the following measures to address inflationary pressures:
- 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.
- 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 – concluded Dr Ferlito – 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”.
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.