THE Institute for Democracy and Economic Affairs (IDEAS) believes that the inflationary pressures and price hikes that Malaysia is now facing is temporary and can be effectively controlled through proper monetary and fiscal policies.

According to the Department of Statistics Malaysia, the country’s inflation rate (as measured by the Consumer Price Index) increased 3.2% year-on-year in December 2021, mainly due to the rise in food and fuel prices and the low base effect.

In a statement today, IDEAS said although the inflationary trend is disconcerting, inflation can be controlled efficiently in the short to medium term through the timely deployment of monetary policies.

It noted that the US Federal Reserve has signalled that it will increase its overnight policy rate (OPR) multiple times this year to tame inflation in the United States.

“Malaysia will likely follow suit by increasing its OPR gradually in 2022 and 2023, whereby Bank Negara Malaysia is expected to increase the OPR by about 50 basis points in the latter half of this year,” it said.

Meanwhile, IDEAS director of Economics and Business Unit and acting director of research Juita Mohamad said the current rise in inflation is a global issue, stemming from stronger demand and higher energy prices, after two years of battling the pandemic through the implementation of lockdowns.

“Covid-19 and the lockdowns led to both demand and supply shocks at a global scale. As a small and open economy, Malaysia was not immune to the devastating aftermaths posed by the pandemic,” she said.

“Inflationary pressure is further compounded by the recent floods in the country, which puts a strain on the supply of selected essential goods produced locally.”

She said to minimise the negative effects of the price hikes on consumers in the short term, fiscal policies, including fuel and electricity consumption subsidies and price ceilings of essential goods, have been deployed by the government in the past.

However, she noted that in the long term, these instruments and interventions need to be rationalised to avoid sustained dependence on subsidies and price ceilings, which would not be economically viable over the long term.

“In our view, a formalised social safety net programme needs to be developed to ensure financial assistance can be targeted and funnelled to the vulnerable households and groups effectively and transparently,” she added. – Bernama, February 16, 2022.