Rakyat complains the price of goods has increased in the recent months. The inflation rate in Malaysia was last reported at 3.3 percent in May of 2011. From 2005 until 2010, the average inflation rate in Malaysia was 2.77 percent reaching an historical high of 8.50 percent in July of 2008 and a record low of -2.40 percent in July of 2009.
Inflation occurs when the rate at which the general level of prices for goods and services is raising and subsequently purchasing power is failing. As inflation rises, every ringgit will buy a smaller percentage of a good. For instance if the inflation rate is 2%, then a RM1 pack of cigarette will cost RM1.02 in a year.
Inflation is not necessarily bad for economy. Modest inflation signifies growing economy. Severe inflation when it goes out of hand will lead to:
– reduced purchasing power. Government servant with fixed income, may find their income is insufficient to provide for the lifestyle they’ve enjoyed previously.
– greater uncertainty in investments as it would be difficult to ensure that returns are greater than the inflation rate.
– domestic products become less competitive globally due to the increased price.
– In severe case like in Zimbabwe, hyperinflation can occur. The value of the currency declines so rapidly that it is not worth the paper it is printed on. This result in the complete breakdown of the economy.
Let take the current inflation at 3% a year.
If you save RM100 under the pillow. In a year, your money will be worth RM97. If you invested RM100 in an investment with 4% p.a return. You will get RM104 after a year but the real rate of return is only 1%, which means your RM104 only has the purchasing power of RM101 a year ago.
If you took up a loan of RM100, with an interest rate of 2% p.a. After a year you will owe RM102 but the actual worth is only RM99. Inflation has reduced the value of your debt.
(Thank you HSBC for explaning this to me..)