Inflation? Wrong Diagnosis Leads to Adverse Impacts

Inflation? Wrong Diagnosis Leads to Adverse Impacts

There has been many comments and criticism about the new Economic Minister’s rationale to regulate rising prices. Rafizi Ramli suggested consumers to cut down on buying chicken in order to lower the prices. His comment was countered today by Centre for Market Education (CME) CEO, Carmelo Ferlito, that our current rise in inflation is actually caused by Malaysia’s expansive fiscal and monetary policies that was introduced to cushion the economic impact of the Covid-19 pandemic where RM305 billion (23% of GDP) in 2020 and RM225 billion (15% of GDP) in 2021 were allocated for that purpose.

Both diagnosis of the problem are common perspectives shared by bourgeois economists and policymakers where their conclusions fall into one of two camps. It’s either-(1) Inflation is caused by too much money in circulation (citing governments stimulus assistance to rakyat) or (2) Inflation is a result of excess demand in the economy when consumers continue to buy even when prices are high.

According to Rafizi, the price pendulum should have worked as Adam Smith envisioned, when demand increases, price of goods will rise, creating an attractive profit margin. That will inspire more producers to jump into the bandwagon and start producing (supplying) that particular good until its sale exceeds demand, then the price will begin to fall. Prices in an ideal market system are supposed to gravitate to a natural price but this rarely happens in a real market place filled with monopoly and hoarding activity.

We have to take note that inflation throughout 2022 has been a worldwide phenomenon, as we have seen in Europe and the United States. Thus, causes of inflation can’t be concluded in a simplistic manner but it requires inclusion of multiple factors.

The pandemic shock, caused significant increase in prices across the board, when cross border logistics were disrupted and global supply chains failed. The capitalist production system is not built to endure such shocks like the pandemic and climate change. Post lockdown, prices of food stuff increased sharply.

No doubt it was also caused by ‘pent up demand’ where purchases for services and goods that were put on hold during the lock down are being spent now, causing a rise in demand within a short period. As food loving Malaysians, many families started enjoying eating out after they were forced to remain indoors during two years of multiple lockdowns. Thus both increase in production input cost and the sudden increase in demand would have caused the current spike in food prices.

Reverting back to Rafizi’s and CME’s diagnosis, I argue that their simplistic conclusions, would lead to adverse impact on the rakyat. The rakyat, especially the B40, simply cannot change their diet overnight, as chicken offers a cheap source of protein compared to fish. With climate change and reducing fish stock, a fish meal is a luxury item for not only lower income, but also middle income families. It’s easy to advise people that they should look for alternative sources, but communities are to compelled to purchase the choices available to them at the nearest accessible markets or grocery shops. If the market offers no other choices, they will buy the easily available chicken meat in order to provide a balance diet for their children. With no increase in real wages, they are forced to tighten their belt further on other important expenses like healthcare or housing in order to put food on the table for their dependents. Haven’t we heard enough reports of the deplorable state of the working people’s financial affairs like lack of savings for emergencies and overburdening debt?

Carmelo Ferlito’s conclusion too will tend to suggest that in order to reduce money circulation in the market, the government needs to cut back on its cash hand-outs to needy families and maybe also put a brake on minimum wage increase. The simplistic view is that, when people have less money to spend, there will be less money chasing after goods and it will reduce aggregate demand and curb inflation. This too will be a disastrous move on low income families, pushing them further into poverty.

Thus it is important that the government looks at a holistic solution and not quick fixes. In order to ensure the rakyat are guaranteed a healthy diet, food products need to be affordable. We need to seriously enhance our local self-sufficiency and not rely on food imports vulnerable to price fluctuations during pandemic, war (Ukraine) and climate disasters. Wages need to be increased and not curtailed to spur local economy, as working people are consumers that spend on local economy unlike billionaires that invest on some financial speculative instruments for their own wealth accumulation.

Our workers share of the GDP (compensation) is only 34.8% of our nominal GDP for the year 2021, confirming that we are still underpaid for the value we create for the economy. Anwar’s cabinet has to work in coherence which each Ministry complementing each other to achieve their goals. Inflation management, price controls, food sovereignty and poverty eradication mission has to be synchronized towards to common program to uplift the rakyat’s well being ultimately.

Sivarajan A
Parti Sosialis Malaysia Secretary General