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Inflation is a measure of the rate of rising prices of goods and services in an economy.

Inflation can occur when prices rise due to increases in production costs, such as raw materials and wages.

A surge in demand for products and services can cause inflation as consumers are willing to pay more for the product.

Some companies reap the rewards of inflation if they can charge more for their products as a result of the high demand for their goods.

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According to Bank Negara Malaysia, headline inflation is expected to range between 2.5 and 4% in 2021. In comparison, negative inflation of -1.2 percent was reported a year ago. According to the central bank, the country's underlying inflation for 2020 remained depressed at 1.1 percent due to excess potential in the economy. The overall inflation outlook, on the other hand, is based on global oil and commodity price movements, according to the study. Today was the release of the Economic and Monetary Review 2020 update. (Zainul, 2021)

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In general, high inflation has a negative impact on the economy. Prices rise more than wages, lowering people's and companies' purchasing power. As a result, the gross domestic product (GDP) is growing at a slower pace (GDP). It also lowers the worth of the currency. The first approach is to raise liquidity ratios, which are the minimum amounts of money that banks must have on hand to fund withdrawals. The more money banks must have in reserve, the less money they will lend to borrowers. Consumers can borrow less if they have less money to lend, resulting in lower consumption. The second approach is to decrease the money supply directly or implicitly by enacting measures that promote the reduction of the money supply. For example, calling in government debts and raising bond interest rates. The latter approach lifts the currency's exchange rate due to increased demand, which increases imports and reduces exports. Both measures would lower the amount of money in circulation and the money will be transferred from the accounts of banks, corporations, and consumers to the government's hands, where it will be able to monitor what happens to it. (Kramer, 2021)

Reference

Zainul, E. (2021, March 31). BNM: Cost-push factors to spur Malaysia's inflation at
2.5%-4% in 2021. https://www.theedgemarkets.com/article/headline-inflation-
temporarily-spike-2q-and-average-between-25-and-4-2021-%E2%80%94-
bnm#:~:text=KUALA%20LUMPUR%20(March%2031)%3A,prices%20besides%20the%20lapse%20of

Kramer, L. (2021). How Do Governments Reduce Inflation?
https://www.investopedia.com/ask/answers/111314/what-methods-can-
government-use-control-inflation.asp#:~:text=Governments%20can%20use%20wage%20and,prices%20and%20increased%20interest%20rates

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The International Monetary Fund has already approved the spending scheme. COVID-19 is costing the UK government a lot of money to fund the health service. The IMF claims that austerity – increased taxes and reduced investment – is no longer the only way to deal with high government debt. Low-interest rates are a critical component of this high-spending policy's performance. We should not be concerned that any of this additional expenditure would significantly increase government debt. Some contend that increasing unemployment would keep salaries and therefore prices down, while others predict a slow recovery. Wages and prices must rise to balance supply and demand. Interest rate hikes would stifle economic recovery, which is already shaky. That would lower the value of properties, such as real estate, and increase the cost of servicing debts. The IMF predicts that government debt would rise to 117 percent of GDP, making such a modest rate hike difficult to maintain. ("The UK government's", 2020)

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Inflation is monitored by central banks in developing economies, including the Federal Reserve in the United States. The Federal Reserve has a 2% inflation goal and changes monetary policy to fight it if rates escalate too high or too fast.  Governments will maximize the amount of net revenue for both corporations and households by enacting expansionary fiscal policies. Businesses can spend tax reductions on capital projects, employee benefits, or new jobs if the government lowers taxes. Additionally, customers have the option of purchasing more products. Increased government investment in infrastructure programs may also help to boost the economy. Consequently, demand for goods and services could rise, resulting in price increases. Central banks can lower interest rates by pursuing an expansionary monetary strategy. Central banks, such as the Federal Reserve, will reduce the cost of lending for banks, allowing them to lend more money to firms and customers. More capital is available in the country, which contributes to increased investment and demand for goods and services. (Boyle, 2021)

Reference
The UK government’s COVID spending may lead to inflation. (2020). The
Conversation. https://theconversation.com/the-uk-governments-covid-
spending may-lead-to- inflation-150405

Boyle, M, J. (2021). What Causes Inflation and Who Profits From It?
https://www.investopedia.com/ask/answers/111314/what-causes-inflation-
and-does-anyone-gain-
it.asp#:~:text=Inflation%20can%20occur%20when%20prices,pay%20more%20for%20the%20product

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In February, the deflationary trend in transportation prices narrowed still further to -2 percent year on year (from -5.1 percent in January) The Consumer Price Index increased 0.3 percent month to month, while headline inflation averaged -0.1 percent for the year. Malaysian inflation is forecast to average 3% this year, up from -1.5 percent last year, according to UOB. According to the study, the average is expected to stay at 1.75 percent for the rest of the year. Global oil and mineral markets are expected to be unpredictable, putting the future in jeopardy. The inflation rate is projected to rise further in the coming months, owing to the lower base of last year, higher retail fuel prices, and the release of pent-up demand, according to the study. Since rising global crude oil prices, the inflation rate climbed above zero for the first time since February 2020. On the monetary front, BNM is forecast to maintain the 1.75 percent Overnight Policy Rate (OPR) for the remainder of 2021. (Jalil et al., 2021)

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Because of the local traders' behavior, the value of the ringgit has fallen and continues to fall. By raising the price of a good, the value of a good that may formerly be purchased in a certain quantity has decreased, resulting in the purchase of the same good in a smaller quantity than before. It was also caused by speculative demand from economists. The news that potential prices will rise causes consumers to purchase goods in vast quantities, causing those goods to become less in demand than normal. To minimize demand, local retailers conceal inventory and raise prices, causing the inflation rate to rise. BNM uses three methods to regulate inflation. The first is monetary policy. Monetary policies are policies that are used to control the money supply to keep the economy stable. Open market operations, formal reserve requirements, discount rates, and moral suasion are examples of monetary policy instruments. The discount rate would also be used. The discount rate on loans and the interest charge on reserves to commercial banks would be influenced by BNM. If inflation rises, the BNM would raise the discount rate charge to deter banks from making loans and borrowing reserves, reducing the flow of money in the economy. The role of BNM in bank policies and operations is known as moral suasion. They usually send orders and directions to commercial and financial institutions about how to manage inflation. (UKEssays, 2018)

Reference
Jalil, A., & Kamel, H. (2021). Malaysia records positive inflation, OPR expected to
remain unchanged. The Malaysian Reserve.
https://themalaysianreserve.com/2021/03/25/malaysia-records-positive-
inflation-opr-expected-to-remain-unchanged/

UKEssays. (November 2018). The rate of inflation in Malaysia. Retrieved from
https://www.ukessays.com/essays/economics/the-rate-of-inflation-in-
malaysia-economics-essay.php?vref=1

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In February, core inflation increased to 0.2% year on year, up from -0.2% in January. In addition to the increase in core inflation, this was fueled by higher private transportation inflation. In February, service rates increased by 0.5 percent, owing to higher prices for tuition and other payments. From February 18, 2020, the government will provide subsidies for the treatment of respiratory diseases at public health preparedness clinics and polyclinics. The subsidies, according to the authorities, had a smaller effect on year-over-year inflation in February. Because of reduced tuition rates and a slower reduction in outpatient care prices, this is the case. (Leo, 2021)

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The supply-side strategy aims to boost long-term growth and competition. Privatization and reform, for example, have the potential to boost the company's productivity. Supply-side strategies will also help to reduce inflationary expectations in the long term. Supply-side policies, on the other hand, have several long-term implications. They cannot be used to combat the recent spike in inflation. Furthermore, This is a demand-side approach that works similarly to fiscal policy. To control the level of aggregate demand, fiscal policy entails changing government tax and expenditure levels. The government should raise taxes and cut government spending to alleviate inflationary pressures. As a result, overall demand will be reduced. Besides, The government's policy influences the extent of its currency's exchange rate. It may choose to manipulate the exchange rate by buying and selling currencies with its gold reserves and foreign currency from its central bank. It can also manipulate the value of the currency by interest rates such as monetary policy. (UKEssays, 2018)

Reference
Leo, L. (2021). Singapore core inflation turns positive for the first time after a year.
CNA. https://www.channelnewsasia.com/news/business/singapore-core-
inflation-increases-february-cpi-services-food-14470388

UKEssays. (November 2018). Major Causes Of Inflation In Singapore. Retrieved
from https://www.ukessays.com/essays/economics/major-causes-of-inflation-
in-singapore-economics-essay.php?vref=1

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After rising 4.5 percent in December, China's consumer price index increased by 5.4 percent in January. The increase in premiums comes as the coronavirus epidemic has slowed economic growth. The epidemic has boosted the demand for drugs that can stop the virus from spreading. Over the weekend, the Chinese government vowed to spend more than $10 billion to combat the virus. According to authorities, the nation had over 40,000 confirmed cases and 908 deaths from the virus as of Sunday night. (Pound, 2020)

Recommendation
Subsidies to firms are one of the potential ways to reduce inflation. The government will provide discounts to companies for them to lower their manufacturing costs. As a result, firms would be encouraged to increase their costs, preventing inflation. The issue here is that if there are a lot of companies to subsidize, the government will lose a lot of money. Another option is to increase the value of the currency. This is that as the economy appreciates, businesses would be able to purchase cheaper raw materials, lowering their manufacturing costs. As a result, the cost of goods is reduced. It will raise demand for its currency by using its foreign currency reserves to purchase its own currency. While this approach can assist companies in lowering their costs, it still has drawbacks. (UKEssays, 2018)

Reference
Pound, J. (2020). Inflation in China is running rampant because of the
coronavirus. CNBC. https://www.cnbc.com/2020/02/10/inflation-in-china-is-
running-rampant-because-of-the-coronavirus.html

UKEssays. (November 2018). Impact of Inflation on China's Economy. Retrieved
from https://www.ukessays.com/essays/economics/inflation-and-its-impact-
on-the-chinese-economy-economics-essay.php?vref=1

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KHOO CHIA SHIEN 75305

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KHOO CHIA SHIEN (75305) EBE1083 - Individual Assignment Cover