LETTER | Inflation is a monetary phenomenon

LETTER | Typical of all politicians, Segambut Bersatu division chief Mahathir Mohd Rais thinks the government can easily legislate prices and control inflation in the country. 

Similarly, the debate in Dewan Rakyat seemed to suggest that the Domestic Trade and Consumer Affairs Ministry is the main culprit for not being able to contain escalating prices now prevailing in the economy.

Sometimes proposals and suggestions are at best wishful thinking borne out of ignorance on how prices and inflation manifest themselves in an economy. I really wish things were that simple - we could legislate and control prices using government machinery. If it is so simple, no country would have suffered hyperinflation and rapid depreciation of its currency from time to time then.

The reality is “inflation is a monetary phenomenon”. Only prudence and the right macroeconomic policy mix are able to stabilise prices and bring them under control. Instead of hitting at the Domestic Trade and Consumer Affairs Ministry, I think the focus should be on Bank Negara and the Treasury.

Monetary growth rate vs real growth rate

The rapid increase in prices in Malaysia and elsewhere is in fact quite expected given the phenomenal growth in money supply everywhere. Worldwide we have seen massive creation of money being dished out to all and sundry due to the Covid-19 pandemic when real growth has been anaemic or non-existent.

Ultimately, inflation is always a monetary phenomenon in the sense that the increase in the prices of goods and services involves a monetary growth rate higher than the real growth rate. We will see inflation in Malaysia and elsewhere be pervasive and troubling whether we like it or not unless substantive measures are taken to contain it starting from now.

The solution to the inflationary problem is not just rudimentary price control or anti-profiteering measures. This is treating the symptoms, not the causes.

The real causes of high inflation are too much “free” money, endemic corruption, slow growth, and lack of competition and over-regulation.

Whether we like it or not, there is always a limit to money creation or the government resorting to massive borrowing particularly from inflationary sources. Too much of this will always manifest through higher prices.

Price control will not work if inflation is cost pushed. It will only lead to a black market or a further decrease in supply. I think we haven't seen anything yet of the inflation here and elsewhere. 

The solution lies with the right macroeconomic policy mix, not piecemeal rudimentary measures like price control or anti-profiteering. Inflation management is like we can’t have the cake and eat it too.  

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