Monday, July 4, 2011

Is Inflation Really The Problem?

Great article in The Star yesterday which echoes my own thoughts on the Malaysian experience of inflation (excerpt):

Inflation: Myths and perceptions

The general view on the street is that Malaysia suffers from rising inflation. Do the statistics back the claim?

RECENT headlines in the Malaysian media have highlighted the issue of the unholy alliance of rising inflation, stagnant wages and subsidies rationalisation.

It is an “unholy” alliance simply because subsidies rationalisation and imported inflation result in rapidly rising price levels. Coupled with the problem of slow rising wages, it implies that our buying power as consumers is decreasing.

Certain quarters would have us believe that Malaysia is a ship headed for an iceberg and a Titanic-style tragedy could happen any time now. To add salt to the wound, they argue that those at the helm, like the captain on the Titanic, are sleeping and that like the passengers on the Titanic, we will not survive this tragedy. But is this gospel truth or an urban myth?…

The only thing that’s missing from this article is the heterogeneity in the inflation experience between higher and lower income households, but that’s nit-picking. The main point is valid – it’s not really higher inflation per se that’s really affecting Malaysians, but rather slow wage growth that has not kept pace with either inflation or productivity.

Go read it, it’s worth your time.


  1. The road worker's sarapan pagi this morning? Plain nasi with a sprinkling of sambal paste.

  2. Actually, just a minor point, wages HAVE kept pace with productivity growth. The problem is that productivity growth was sluggish, as shown by various reports (NEM Part 1, World Bank Economic Monitor in Oct 2009 entitled "Repositioning Growth", etc). That is why wages have not grown.

  3. Yeah I know - just a bit of hyperbole on my part. Actually when you measure it out, wages have kept pace with inflation and productivity, but not both together.