INFLATION

Content
Introduction of the problem
Literature reviews
Ways to solve the problem
1. Economics indicators
2. Economics theory/theories
Conclusion
Suggestion & policy implication
INTRODUCTION
Inflation refers to the sustained increase in the aggregate price level over time.
Persistent growth in prices can hurt an economy as the standard of living of
households largely depends on real income (income adjusted for inflation).

In economics, inflation is a rise in the general level of prices of goods and services in an
economy over a period of time. The term inflation once referred to increases in the
money supply (monetary inflation); however, economic debates about the relationship
between money supply and price levels have led to its primary use today in describing
price inflation.

In 2021,during the Covid-19 pandemic, the inflation was expected to increase by BNM
from 1.5% to 2.5% on average. This is a result of the economy's slow recovery and the
anticipated rise in demand for products and services as a result of the relaxation of
movement restrictions.
This scenario did not only affect the Malaysia economics but also
the Malaysian household economics.
RAM is currently projecting (Malaysia’s) overall inflation to climb
further to 3% this year from 2.5% last year, with much of the
increase largely driven by higher food prices. And given that food
constitutes around 30% of household expenditure, higher food
prices will definitely hurt household budgets quite prominently.
(Jhek , W.K, 2022)
Literature Review
For many years, since the word "inflation" began to be used, it was a condition of paper money—a
precise definition of a monetary policy—rather than a statement about prices. Today, inflation is
thought of as simply a rise in prices, and its relationship to money is frequently disregarded. Today,
many types of inflation are frequently mentioned. In fact, the terms "inflation" and "price increase" are
frequently synonymous. However, there is another, more precise definition of inflation, which is a rise in
the overall level of prices brought on by an imbalance between the amount of money in circulation and
trade demands. (Michael.F Bryan, 1997)

In these literatures, we are primarily focusing on the consequences of global inflation. According to one
of the articles, inflation's impacts can eventually destroy economic activity. A study to look into the
impact of inflation and money supply on Vietnam's economic growth from 1990 to 2017. The research
shows that because inflation is asymmetric in the long run, it has a negative impact on economic
growth. As a result, over the long term, the impact of rising inflation is greater compared to falling
inflation. This distinct effect is significant, and high inflation will destroy economic activity. As a result,
the study offers empirical support for the government's monetary policy plans and efforts to slow
inflation in order to promote long-term sustainable economic growth. (Bui Hoang Ngoc, 2020)
Furthermore, an article from a journal, studies how GDP growth in eight countries in Central and Eastern
Europe is affected by inflation and its uncertainty. According to the study, inflation uncertainty has a
much greater negative impact on GDP growth. Smaller economies, like those of Latvia and Estonia, are
more negatively impacted by inflation uncertainty during both economic upswings and downturns,
perhaps as a result of their vulnerability to outside inflationary shocks. For the economies of the bigger
countries, inflation uncertainty shocks only slow GDP growth when output growth is extremely low or
negative. (Živkov D, Kovačević J, Papić-Blagojević N, 2020)

Both of these inflation scenarios, still have a detrimental effect on those countries. The effects of inflation
can be felt by many different parties, including consumers and households, in different ways. Therefore,
we need a solution to overcome this issue.
HOW TO SOLVE THE INFLATION?
 Economic
Indicators

Gross Domestic Consumer Price Unemployment

Product (GDP) Index (CPI) Rate
Gross Domestic Product (GDP)
Gross Domestic Product (GDP) is the most comprehensive
economic indicator that describes national income by
calculating the value of goods and services produced by all
factors of production in the country for a period of one year,
regardless of whether the factors of production belong to the
country or to foreign countries.

A higher GDP points means a stronger economy and be divided

by the population (GDP per capita) to show the country's
standard of living.

If the overall economic output is declining, or merely holding

steady, most companies will not be able to increase their profits.
However, too much GDP growth is also dangerous, as it will
most likely come with an increase in inflation, which erodes
stock market gains by making our money less valuable.
Consumer Price Index (CPI)
It displays the change in price for a set basket of products
purchased by a typical working-class family, show the cost of
community livelihood, and detect inflation through
improvement in CPI.

This index is significant because it is used to modify a variety

of relationships that have an impact on standard of living
such as wages, rent, and social security benefits.

When the CPI is rising it means that the consumer prices

have increased, and the inflation rate is rising, and when it
falls it means consumer prices are generally falling and
inflation would be decreasing.
Unemployment Rate
Unemployment rate is an economic indicator that measures
the percentage of unemployed among the existing labor
force in a country

A low unemployment rate refers to the unemployment in the

country is small compared to the total labor force which
means the labor force in the country has been fully utilized. A
high unemployment rate reflects many laborers who should
be able to contribute in the national economy but do not get
jobs which leads to the waste of labor production factors in
the economy.

Inflation has historically had an inverse relationship with

unemployment. This means that when inflation rises,
unemployment drops. Higher unemployment, on the other
hand, equates to lower inflation. When more people are
working, they have the power to spend, which leads to an
increase in demand.
Economic Theory
There is three major economic theory that can be used to
solve the problem :- Neoclassical, Keynesian, and Marxian

The most relevant theory to solve Inflation is the

Keynesian Theory.

In times of economic downturn, Keynes proposed a

monetary strategy that would increase effective demand
and investor confidence. One example of Keynesian
theory in action is the US Federal Reserve's ongoing
"quantitative easing" initiative.

With its focus on the influence of institutional authority

and mass psychology, Keynesian theory contends that big,
interconnected macroeconomic systems are what shape
individual behaviour.
the other two theory argues that:-
Neoclassical theory holds that individual choices and productive capacity are the most
fundamental economic drivers. It sprang from an intellectual tradition that valued
human consciousness and reason in the 18th century.

Marxism opposes determinist reasoning and asserts that all occurrences or objects in
the economy are overdetermined.

Viljoen (2014) stated that Keynes' suggestions for the international monetary system
emphasised macroeconomic management rather than Adam Smith's "invisible hand,"
minimising investor uncertainty in order to stimulate investment and creating a flexible
monetary system that would increase global demand and employment. Keynes
advocated for governments to adopt a system of fixed but flexible exchange rates and
capital controls in order to retain monetary policy flexibility and stimulate investment
demand.
Suggestions and
policy implications

Monetary policy
Monetary policy is where the government will
control the money supply and demand in the
economy.
This method will be taken to achieve
economic growth.
There are 3 methods will be taken in
monetary policy, Open Market Operations,
Interest Rates, Reserve Requirement.
 Open Market Operations
Open Market Operation is when the Federal Reserve Bank buys bonds
from investors or sells additional bonds to investors to change the
number of outstanding government securities and money available to
the economy as a whole.
When the money available in the economy is high, the government will
sell bonds. On the other hand, when the money available in the
economy is low, the government will buy bonds.
During the inflation, the central banks will sell government bonds to
banks . Hence, the money available in the economy will decrease.
Interest Rate
Interest rates are where,the central bank may
change the interest rates of the loans and
savings.
Therefore, when the interest is high, demand
on loans will decrease, and the savings will
increase. Meanwhile, when the interest is low,
demand on loans will increase, and the
savings will decrease.
Hence, when a country's economy is facing
inflation, the government will increase the
interest rate to control the money available in
the economy.
Reserve Requirements
Reserve requirements is where the government
authorities will manipulate the funds that banks
must retain as a proportion of the deposits made
by their customers to ensure that they can meet
their liabilities.

Lowering this reserve requirement releases more

capital for the banks to offer loans or buy other
assets. Increasing the requirement decreases bank
lending and slows growth. Hence, during the
inflation the government will increase the reserve
requirement.
Taxation
Tax is a compulsory payment in the form of money imposed by the
government based on acts of parliament
During the inflation, the tax rate will be increased to reduce the
disposable income. By doing so, the purchasing power and
consumer demand will decrease, causing the aggregate spending
also decreases
Hence, the money available in the economy will reduce and the
inflation can be controlled.
Government budget
Government budget is where the government will
make expenditures by using tax revenue and non-
tax revenue sources. these expenditures includes
the daily management, administrations and
investments in projects.
During the inflation, the government budget will
be reduced to decrease the aggregate demand
and supply.
Decreased aggregate demand will slow down
economic growth and lower the consumer's
purchasing power
Hence, the general price level in the market will
decrease and the inflation rate will also decrease.
 CONCLUSION

The inflation phenomenon will continue to

keep economists and the Governmental
Organisations on their toes for as long as
imbalances between demand and supply
persist in an economy.

it is important to remember that if the

Governmental Organisation stays
committed to tapering demand slowly and
supply chains continue to improve
worldwide, it is possible for inflation to
return to its target without a significant
recession.
Vol. 77, No. 1 | pp. 10-16 This issue of the Journal went to press in December 2022.
Copyright © 2023, Society of Financial Service Professionals. All rights reserved.

References:
Viljoen, D. (2014). To Reduce Inflation: New Application of Old Theories. Mediterranean Journal of Social
Sciences. https://doi.org/10.5901/mjss.2014.v5n21p313

https://slideplayer.com/slide/5775021/

What is consumer price index (CPI) & how to use it? AvaTrade. (2022, October 31). Retrieved January 9,
2023, from https://www.avatrade.com/education/economic-indicators/fundamental-
indicators/consumer-price-index

Barnes, R. (2022, July 13). The importance of inflation and GDP. Investopedia. Retrieved January 9, 2023,
from
https://www.investopedia.com/articles/06/gdpinflation.asp#:~:text=Over%20time%2C%20the%20growth
%20in,than%20detrimental%20to%20the%20economy

DePersio, G. (2022, May 6). What happens when inflation and unemployment are positively correlated?
Investopedia. Retrieved January 9, 2023, from https://www.investopedia.com/ask/answers/040715/what-
happens-when-inflation-and-unemployment-are-positively-
correlated.asp#:~:text=Inflation%20has%20historically%20had%20an,to%20an%20increase%20in%20dem
and
Thank
You