Macroeconomics

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TOPIC:
ANALYSIS OF TRENDS OF CONSUMER PRICE INDEX (CPI)
AND INFLATION PATTERN IN THE MALAYSIAN MONEY
MARKET FROM 1980 - 2017.
LECTERUR’S NAME:
PROFESOR MADYA DR ZAINIZAM BIN ZAKARIYA
GROUP 1
NAME:
MATRIKS NO:
MUHAMMAD FADZLY MAHRUDIN
D20181081904
NUR AFIFAH IRDINA BINTI SHAHLAN
D20181081871
NUR RAHAYU BINTU ABU TALIP
D20181081901
IZYAN HAZIMAH BINTI ROSLAN
D20181081880
NUR SA'AIDAH BINTI MOHD ASRI
D20181081874
1.0
TOPIC : ANALYSIS OF TRENDS OF CONSUMER PRICE INDEX (CPI)
AND
INFLATION PATTERN IN THE MALAYSIAN MONEY MARKET FROM 1980 - 2017.
2.0 INTRODUCTION
The title of our survey is the trend analysis of the Consumer Price Index and the inflation pattern in
Malaysian financial markets from 1980 to 2017. The Consumer Price Index (CPI) is the method used to
measure or determine the inflation rate. The CPI measures the average price of goods and services normally used by households over a specified period of time. The CPI is measured by comparing the average
price of goods in the base year with the prices of pirates of goods during the current year. The CPI takes
into account the prices of goods and services bases generally classified under the "United Nations Indicators of Individual Use".
There are many categories of goods and services that are also taken into account during the CPI
computation process. Among the goods and services are food and non-alcoholic beverages, alcoholic
beverages and tobacco, clothing and footwear, housing, water, electricity, gas and other fuels, health,
transportation, communications and many more. The price used in the computation of the CPI is the
retail price regardless of whether it is expressed as an ordinary price or special price including all excise
sales taxes and excise taxes imposed on certain commodities. These prices are collected within a set
period of time. In Malaysia, this collection is held every month for all items except for the badly damaged
food items collected weekly. Exceptions are given to rental of houses collected on a quarterly basis.
Inflation is an increase in the general price of a product or service in an economy from time to time.
This increase caused every unit of currency to only buy goods and services in lesser quantities than ever
before. Inflation also explains the decline in purchasing power, which is the real loss in the internal
exchange medium and the account units in a country. The main size of inflation is through inflation rate,
which is the annual percentage change in a general price index over time.
Inflation, which is the price change for a group of goods and services this too is one of the most
anticipated indicators to measure the overall economic development of a country. Low and most stable
inflation rates are often found in healthy and developing economies with the right monetary policy. On
the contrary, the weakening inflationary environment will have a significant impact on the reduction of
purchasing power and individual savings, while deflation also shows the economic downturn. Economists and policy makers work closely with the central bank to coordinate optimally open market operations and monetary policy adjustments that are capable of promoting stable long-term inflation rates.
The relationship between consumer price index and inflation is positively correlated, ie, the higher
the CPI then the higher inflation rate in the country. In general, most parties understand the conceptual
meaning of the relationship but are still unable to explain it clearly. Most parties do not emphasise the
average price and comparison with the price level in the base year. They also do not emphasise the
general price increase when it comes to inflation.
Based on the assignment given, we will compare the trend of the Consumer Price Index (CPI) with
inflation patterns recorded from 1980 to 2017. We will also discuss factors that have influenced CPI and
national inflation in the following years as well as clarifying with more profoundly about the effects of
the Malaysian financial markets as a result of the CPI pattern and inflation.
Inflation rate = CPI (current year) - CPI (base year) × 100
CPI (base year)
3.0 DATA
’Figure 1 : Malaysia Consumer Price Index (CPI) from 1980 to 2017
Figure 2 : Malaysia Inflation Rate from 1980 to 2017
YEAR
CPI
INFLATION RATE
1980
41.38
6.68
1981
45.39
9.69
1982
48.03
5.82
1983
49.81
3.71
1984
51.76
3.91
1985
51.93
0.33
1986
52.32
0.77
1987
52.47
0.29
1988
53.81
2.55
1989
55.32
2.81
1990
56.77
2.62
1991
59.7
5.1
1992
62.3
4.4
1993
64.3
3.3
1994
66.3
3.0
1995
68.9
3.9
1996
71.5
3.8
1997
73.1
2.2
1998
77.6
6.2
1999
79.3
2.2
2001
81.6
1.5
2002
83.3
2.1
2003
83.9
0.8
2004
85.1
1.3
2005
87.7
3.1
2005
87.7
3.0
2006
90.9
3.6
2007
92.7
2.0
2008
97.7
5.4
2009
98.3
0.6
2010
100.0
1.7
2011
103.2
3.2
2012
104.9
1.7
2013
107.1
2.1
2014
110.5
3.1
2015
112.8
2.1
2016
115.1
2.1
2017
119.6
3.8
Table 1 : Trend of CPI and Inflation in Malaysia from 198o to 2017
4.0 DATA ANALYSING
Based on the table and figure above, we can see the trend of Consumer Price Index
(CPI) and inflation rate in 1980 to 1985 in Malaysia. From 1980 until 1985, the CPI was increase slightly from 41.38 to 51.93 in 1985. The inflation rate in 1981 increase from 6.68% to
9.69% and after that decrease every year until 1985 to 0.33%.
The CPI of Malaysia shows a steady increase from 1991 to 2000. However, the country's inflation rate in the same years also shows a fluctuating pattern that has been attributed to
several factors.
From year 2001 to 2005 the CPI is increase but inflation rate in 2001 to 2002 slightly
rise and decline in 2003. However in 2004 to 2005 inflation rate become increase. During the
2005 until 2017, the CPI continue to increase without any fluctuation while the inflation increase and decrease from time to time with reaching the peak of 5.4 and lowest of 0.6
5.0 DISCUSSION
In macroeconomic, Consumer Price Index ( CPI ) is an indicator of the average
price change of a group of selected goods and services in the economy for a year compared to the base year. Inflation is a continuous and unrestricted general price increase
or the increase in the average price of goods and services in the economy. The relationship between CPI and inflation is when the general price level increases, the Consumer
Price Index will increase and the inflation automatically will rise too.x
The 1980’s:
The inflation rate in 1980 and 1981 were high due to oil crisis. Oil crisis is a sudden
rise in the price of oil that is often accompanied by decreased supply. As we know that the oil
provides the main source of energy for advanced industrial economies, an oil crisis can endanger economic and political stability throughout the global economy. The rise in the price of oil
is a factor of increasing the prices of goods especially daily necessities like food. It indirectly
increase the national inflation index as we can see in 1980 the inflation rate is 6.68% and increase to 9.69% in 1981. This oil crisis is a result of the Iranian Revolution. The Iranian oil was
damaged by the high levels of social unrest and it leading to a large loss of output and a corresponding rise in prices that make high in the inflation rate. The situation worsened following
the outbreak of the Iran-Iraq War (1980-1988), which further added to the level of instability
throughout the region. The price of oil was stabilised at $32 per barrel in 1981. However, major
capitalist economies had adopted more-efficient methods of production by 1983. The inflation
rate in 1983 and 1984 was stable that is 3.71% in 1983 and 3.91% in 1984.
In 1985, the inflation rate was too low that is only 0.33%. At that time, there was an
economic crisis. The crisis economy has caused government spending to be affected. It also
caused the price commodity fell sharply such as petroleum, palm and tin as well as a string of
global economic slowdowns. In 1985, the consumer price index is increased slightly. It makes
the inflation rate very low at that time.
Within five years which are 1986 until 1990, we can identify the years that show
low and high inflation rates. From the data above, the CPI at 1986 ‘s shows 52.32 and
has increased to 52.47 at 1987. In 1988, it has been recorded 53.81 and increased to
55.32 at 1989. 56.72 has been stated in 1990 and have shown continuous increased.
Then, in 1986 has shown an inflation rate of 0.77 and slightly decreased in 1987 (
0.29 ). In 1988, it rose greatly from 0.29 to 2.55 and 2.81 in 1989. The inflation rate in
1990 has shown a declined of 2.62.
In 1987, it has recorded the lowest inflation rate which was 0.29. During the year
there was a fall in commodity prices that affected the rate. Oil production increases
through the discovery of new oils wells, especially in the North Sea ( Europe ) and
Alaska ( US ). As a result, the world supply has grown and the OPEC has taken steps
to keep the market share by not lowering the quantity. As a result, the prices have fallen.
Other than that, the rise in Dollar also caused a dropped in commodity prices. When
the Dollar rises, it causes commodity prices to fall. As a result, the price of oil in Malaysia falls, prices become cheap and inflation rate falls.
Then, in 1989, it has stated the highest inflation rate which was 2.81. Malaysia’s
economic performance in 1988 showed the country’s economy had a strong recovery
from the recession. GNP actually grew 7.4% with all sectors experiencing positive
growth. This recovery is supported by export growth, encouraging commodity prices,
government budget saving measures and increased private investment. The state budget
in 1989 has introduced several strategies to strengthen the economic recovery process.
Tax System Reforms involved direct tax deductions, review of tax incentives under the
Investment Incentives Act and review the exemptions and tax deductions given to companies under the Income Tax Act. Some tax rates that rising and implemented in 1989
resulted in rising prices for goods and inflation.
1.
1990s: - The period of strong domestic demand and large capital inflows
Inflation in the 1990s remained above 3%, except in 1997 and 1999. The increase in prices was comprehensive, driven by demand and supply factors. During this
period, domestic demand was resilient, following strong earnings and employment
growth. Significant increases in real estate and equity prices supported by strong growth
in domestic liquidity and credit, in large capital inflows, resulted in net wealth value
rising and supporting domestic economic activity. The Kuala Lumpur Stock Exchange
(KLSE) main index jumped to a record high of 1,314 points in early 1994, while the
Malaysia House Price Index (CPI) grew at an average of 7.6% per annum in the decade
with a record increase of 25.5% in 1991 Due to the inflated real estate market prices,
average rental rates rose steadily, leading to categories of fuel, gross rent and power to
record the highest inflation rate in 13 years of 4.4% in 1998.
Domestic supply factors contributed to inflation, especially in the food category. Food supplies are characterised by poor weather conditions, reduced agricultural
land, price adjustments are governed by Government, lack of workforce and high capacity utilisation. Prices for fruit, vegetables, fish and meat subcategories increased
throughout the 1990s. Inflation in the transport and communications category was also
higher due to bus and taxi fares and increased postal service charges. Inflation posted a
record high of 5.3% in 1998, reflecting an increase in cost pressures attributable to
higher imported prices due to a ringgit depreciation of 28.3% against the US dollar by
the end of 1997, and due to the lack of essential food items. Due to the higher cost of
imports, the Government raised the ceiling price for five administered prices, namely
cooking oil (5% increase), chicken (5% increase), flour (20% increase), sugar (21% 6%
increase).
2.
,
2000 - Present : More sustained increases in global commodity prices
In early 2000, inflation moderated to a very low level when demand and supply pressures that became a major feature in the 1990s have escaped.The moderation in
inflation rate this year reflected partly lower food prices. Foods comprising more than
one third of the CPI basket, increased at a lower rate of 0.7% in 2001 (1.9% in 2002).
Despite moderation, food supply and production increased during the year amid favourable weather conditions and government measures to boost local food production. Food
import prices were also lower due to modest ringgit appreciation.
Despite excess capacity, prices for beverages and tobacco, transport and communications, and medical and healthcare expenses recorded higher rates of increase.
Most of these increases reflect the effect of price adjustments from the higher bus fares
(10-30%) were introduced in July-October 2000 and higher prices for some petroleum
products (7.6-9.4%) commencing October 2000. The increase in sales tax on alcoholic
beverages (5%), and tobacco and tobacco products (10%) that was announced in
Budget 2001, came into effect in November 2000. Higher prices for some pharmaceutical products (10-20%), with effect from March 2001. Higher domestic airplane fares
(51.8%) commencing August 2001. Adjustment of the price of gasoline (8.3%) and the
increase in import and excise duties on cigarettes and tobacco products (20%), which
came into force in mid-October 2001, following the tabling of the 2002 Budget. These
goods and services account for 9% of total CPI rations and higher prices for these goods
and services contributed 0.64% to total CPI inflation in 2001. Meanwhile, price increases for other sub-groups remained relatively stable, except for clothing and shoes,
whose prices continue to decline this year.
The mid 2000 which was 2005, the inflation reached a peak of 8.5% because
of external factor which were the higher global commodity and food prices. The global
economic crisis was also happened a few years after that. It causes the sharp fall in
share price but the damage was far less than the Asian financial crisis that happened in
1997/1998.
In 2015, The Ringgit Depreciation happened. The ringgit Malaysia dipped
towards a record low at RM2.99 and this causes inflation because of the higher cost of
buying. Consumer prices increased more than expected in July, compared
with a year earlier on the effects of a fuel-price hike, a weaker
ringgit and the lingering impact of the goods and services tax (GST)
in April. The consumer price index (CPI) rose 3.3% to 113.9 after fuel
prices were adjusted higher from the beginning of July while the second-round effects from the GST continued to have an impact.
Based on the ending of 2016, the inflation rate rose and the consumer price
index by 2.7% compared to the end 2015 according to The Star newspaper. The price
of CPI led by increases in the index for alcoholic beverages & tobacco group by 22.8%;
restaurants & hotels (+4.7%); food & non-alcoholic beverages (+4.6%); health (+4.6%)
and furnishing, household equipment & routine household maintenance (+4.2%).
The higher cost of fuel contribute to the increase of inflation such as in December 2017. The higher cost of fuel raised the inflation rate by 3.5% in December but
it was in the expectation line. The Statistics Department reported that overall index for
inflation, as measured by the consumer price index (CPI) rose by 3.5% to 120.9 in
December 2017 from 116.8 in 2016.
6.0 CONCLUSION
Based on our research, it is clear that the Consumer Price Index (CPI) in Malaysia is increasing every year while inflation shows uncertain patterns. This is due to
the various factors that can affect both these parts. Among the factors we have found
as a result of our study are the period of strong domestic demand and large capital
inflows, more sustained increases in global commodity prices and so on. We also managed to understand more clearly about the relationship between CPI and inflation. Positive relationship between these two important units will determine the health and economic growth of the country each year. Appropriate measures have also been taken by
the government to address inflationary problems from worsening and savage. Uncontrolled levels of inflation will have a particularly severe impact on the social and economic situation of the country. When inflation is uncontrolled and the n became hyperinflation, this will cause everything to cost so much more than it used to. The latest
example of uncontrolled inflation is in Venezuela inflation rate
approaching
150,000%. Therefore, it is clear that inflation and CPI are very important in measuring
the economic growth of a country as well as taking into account the level of living and
the cost of living of all citizens.
7.0 REFERENCES
1.https://ms.talkingofmoney.com/predict-inflation-with-producer-price-index
2.https://www.coursehero.com/file/p62p1l6/Seterusnya-hubungan-antara-indeksharga-pengguna-dengan-inflasi-ialah-berhubung/
3.https://tradingeconomics.com/malaysia/inflation-cpi
4.https://tradingeconomics.com/malaysia/consumer-price-index-cpi
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