Inflation Rate in Malaysia

The rate of inflation is the annual rate of price index growth, usually the index of consumer
prices over time. When one year from now, the same product purchased today for 1 U.S. dollar is
purchased again, but for 1.03 U.S. dollars, the inflation rate is 3 percent. Generally speaking,
each country is seeking a low inflation rate, and a rate of 3 percent is considered low, as is
expected for Malaysia in the next few years. There was, however, a slight increase in Malaysia's
inflation rate, from approximately 2% in 2010 to just over 3% in 2011.
Inflation can be characterized as a persistent rise in an economy's aggregate or overall price
level, which means that the cost of living increases. Inflation is also referred to as the year-on-
year percentage change in the consumer price index (CPI) rate. Inflation can be said to be an
ongoing issue across the nation in sustaining low cost of living, high growth, health economy,
and decision-making by policymakers. Based on a country's economic situation, inflation has a
positive and negative effect (Liwan & Lau, 2007). On the other hand, healthy economy is
characterized by a modest level of inflation.
Inflation has generally become one of the major issues over a period of time. Over the past few
years, inflation in Malaysia has been caused by many factors. Those factors are not economic
factors, but social and internal factors.
There is also a division of economic factors into currency and non-monetary. Money supply is
one of the economic factors that, according to monetary factors, cause inflation in Malaysia.
Studies by Cheng and Tan (2002) found the positive relationship between the supply of money
and inflation. If the effect of money supply on the inflation rate is known, the government must
try to enforce appropriate means.\\
Amadeo (2012) said that inflation occurs when prices continue to grow for most goods and
services. The standard of living decreases when this happens. It is because each dollar buys less,
so we must invest more in order to get the same amount of goods and services. Inflation leads to
economic problems and distortions in the working economy, according to Cheng & Tan (2002),
which could put an end to a country's economy growth rate. Inflation is likely to occur as major
variables of the economy shift including fiscal deficit and excess supply of money. The cash and
inflation rate have a positive relation, said Friedmand & Schwarts (1982). Cheng and Tan (2009)
have agreed that in Malaysia inflation has been well controlled over other neighboring countries
during the last financial crisis. Baghestani & Abu Al-Foul's (2009) research analyzes the accurate
information on inflation provided by the Federal Reserve after the government forecast.
 Figure 1:Inflation Rate in Malaysia
Problem Statement
Inflation, whether developed or industrialized, has always been a major economic topic
discussed for the development of the country. It can be defined as the continuous rise in the price
levels of goods and services, which is due to currency value declines and eventually reduces
buying power. There may be a variety of ramifications or issues if we neglect the
macroeconomic variables ' effect on inflation. Inflation leads to hyperinflation, as consumers
spend more before prices rise if price increases are observed. Inflation has had a negative impact
on growth, and is detrimental to the economy in Tanzania, Kasidi and Mwakanemela (2013). In
the short run, a statistically significant and negative correlation between GDP and inflation tends
to be. The growing demand for goods leads to an excess of supply and the cost of production of
supply is therefore rising.\
Several researchers have had an inflationary experiment in several countries all over the world.
Nonetheless, the inflation literature received different views and could not yet reach the same
conclusion. Malaysia has always been the major concern of economists, primarily because of
increased transport costs caused by rising global oil prices and weak Malaysian currencies.
The study aims to analyze the effects of the macroeconomic factor in Malaysia's economy from
2000 to 2018 on inflation. As the inflation rate is the independent variable, there are there
independent variable will be used to identify how these variables affect the inflation rate. The
three main variables consist of gross domestic product (GDP, unemployment rate and . Philips
curve investigates the connection between joblessness and economic inflation. The value of
money would fall during inflation. The low rate of inflation does not gradually increase the price
of goods and services. Therefore, by using that method they improve their monetary policies to
ensure that the inflation rate is lower. In that respect, for decision makers and central banks the
Phillips curve was also an important consideration

Research Question
a) Is there a long-term and short-term relation between all determinants and inflation?
b) Do we have enough proof that the variables are significant?
c) How does the three dependent variable affect the dependent variable?
Gross Domestic Product
The Gross Domestic Product (GDP) according to Sictus (2010) is a fundamental determinant of
economic performance in a country, and the market value of all final goods and services
produced at the borders of a nation within a single year. Over the years, Malaysia's economy has
performed well due to the nation's fiscal stability, the government's sound financial and
economic policies, and its effective natural resources management. The Gross Domestic Product
(GDP) is set to fall in relation to the consumer price index (CPI) in the light of food price
increases, analyzed by Moorthy & Kolhar (2011). Researchers have studied the rise of monetary
policy food prices in India. Gross domestic product shows that there is a negative / inverse
inflation relationship (IPR). In contrast, inflation (CPI) will decrease by 0.835934 by 1% of the
gross domestic product. The key inflation determinants in Tanzania were investigated by Laryea
& Sumaila (2001). In order to conduct this research, the time series data were used annually
between 1992 and 1998. They found that CPI was adversely affected by GDP. The recent
researcher has confirmed that GDP and inflation have a negative relationship (Aurangzeb, 2012).

Interest Rate
The rate of interest is one of the inflationary factors. The interest rate being for the banking
industry can be a means of generating investment and borrowing money by the company or
individual. The rate of interest tends to rise in general. The exchange rate can also have an effect
on the balance of payments and can influence them. This view has been captured by Cristadoro
&Veronese (2011) by claiming that the bank rate or the interest rate of the bank used to borrow
funds from RBI was actively applied. RBI also used the cash reserve proportion that should be
held by the bank as a share of its request.

Unemployment Rate
The trade-offs between inflation and unemployment have been noticed by Ponzoni and Zilli
(2015). They evaluated the relation using the Phillips curve on the basis of inflation in Brazil.
They also said that the link between production and inflation rate is positive. The relationship
between inflation and unemployment was studied by Furuoka (2007). He examined the
relationship using the 1973-2004 time series in Malaysia. This analysis was conducted with the
co-integration experiment from Johansen. The results demonstrate that there is a negative
relationship between long-term unemployment and inflation.
In Malaysia between 1998 and 2004 the unemployment figure increased by approximately 3.5%
in the same timeframe from 1975 to 2004, in terms of inflation (see Figure 2). In the second half
of the 1970s the inflation rate was about 44 percent. In 1980, it rose to 6.6%, while in 1981 it
continued to grow to 9.7%. From 1982 the inflation rate dropped further to less than 1% in 1986.
In the first half of the 1990s inflation in the country was stable at around 4%. (Munir & Furuoka,
2014).
Based on figure 3, it can be see that every change in M will cause only the P to change. On the
other hand, if the economy operates at less than full employment level of output, then a change
in M will get reflected more in Y than in P. As a result, the excessive increase in money supply,
will lead to excessive increase in price which cause inflation. Besides, the changes that happen in
stock of money will effects the price level and real national income in an economy, according to
the movement in the velocity of money. Stability of the velocity of money alternatively means
stability of the demand for money, as both are inversely related.

Figure 2: Unemployment and inflation in Malaysia (1975 – 2004)

Conclusion
Inflation is generally caused by the fall in total supply, which correlates to the rise in aggregate
demand. It can be regulated by increasing goods and services supplies to control aggregate
demand, and by rising money's income. High inflation can have adverse effects on a given
country. More can affect inflation in Malaysian because the R-square value does not exceed
60%. This demonstrates that the three main factors discussed in this analysis are only one of the
inflationary factors in Malaysia.
Inflation is a major issue in every part of the country and it will affect not only economic growth
in the country, it will impact CPI, the labor market and investors and so on. In order to overcome
the problem of high inflation in Malaysia, the government will try to reduce excessive spending
in non-development activities. This will also ensure that private spending, dependent on
government demand for goods and services, is checked. To avoid such a situation, this measure
may be supplemented more effectively by taxation
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