Kuala Lumpur, 16 February 2022 – The Institute for Democracy and Economic Affairs (IDEAS) views the inflationary pressures and price hikes that Malaysia is currently facing as temporary and can be effectively controlled through proper monetary and fiscal policies. According to the Department of Statistics Malaysia, the country’s inflation, as measured by the Consumer Price Index (CPI), increased 3.2% year-on-year in December 2021, mainly due to the rise in food and fuel prices and on base effect. 

IDEAS notes that the US Federal Reserve has signalled that it will increase its OPR multiple times this year in order to tame its own inflation. Malaysia will likely follow suit by increasing its OPR gradually in 2022 and 2023. BNM is expected to increase the OPR by about 50 basis points in the later half of this year.

Commenting on the inflation and price hikes, Dr Juita Mohamad, IDEAS Director of Economics and Business Unit and Acting Director of Research said, “The current rise in inflation is a worldwide issue, stemming from stronger global demand and higher energy prices, after two years of battling the pandemic through the implementation of lockdowns. The pandemic and the lockdowns led to both demand and supply shocks at a global scale. As a small and open economy, Malaysia was not immune to the devastating aftermaths posed by the pandemic. Inflationary pressure is further compounded by the recent floodings in the country, which puts a strain in the supply of selected essential goods produced locally.” 

“To minimise the negative effects of the price hikes on consumers in the short term, fiscal policies including fuel and electricity consumption subsidies and price ceilings of essential goods have been deployed by the government in the past. However,  in the long term, these instruments and interventions need to be rationalised in order to avoid sustained dependence on subsidies and price ceilings, which would not be economically viable over the long term. In our view, a formalised social safety net program needs to be developed to ensure financial assistance and aid can be targeted and funnelled to the vulnerable households and groups effectively and transparently.” 

Even though the inflationary trend is concerning, IDEAS believes that with the timely deployment of monetary policies, it can be controlled efficiently in the short to medium term. Nevertheless, to minimise the negative impacts of the price hikes on consumers, fiscal policies including subsidies and price ceilings should only be used in the short term. In the long term, the government needs to develop a more structured and shock-responsive social safety net for social protection, so that targeted financial and non-financial aid can be channelled to vulnerable households and groups. This has been previously argued in the IDEAS Policy Ideas No. 69 on “Social Protection for the Poor and Vulnerable Malaysians during COVID-19” accessible here.

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