1 Advantages and Disadvantages for inflation PDF

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Advantages and Disadvantages of inflation In economy, inflation has the major effect power on the entire country’s economy. Inflation occur when there is a continuous increase in the overall price level. It is foreseeable that high inflation rates create uncertainty and erase the value of savings. However, most Central Banks set the inflation rate at 2%, indicating that low inflation has various economic benefits. During the economic stagnation period, some economists suggest that we target a high rate of inflation. The reason is because it has its advantages and disadvantages for inflation.

ADVANTAGES Relationship between inflation and capital formation A prediction is made about a relationship between the rate of inflation and the rate of capital formation which is positive relationship. [Mundel (1965) and Tobin (1965)] According to their logic inflation reduces people’s wealth. Lower rate of return due to personal real currency balance. To accumulate the wealth they need, people save more by switching to assets, and more saving means more capital accumulation, which accelerates output growth.

Inflation enables adjustment of relative prices In Malaysia, two studies considered as the effect of inflation on relative price [Zaidi et. al (2002) and Abdul Karim et al (2008)]. The previous study is focused at the relationship between inflation and the relative price which measures price differences in the economic regions, namely the Peninsular Malaysia, Sabah and Sarawak. Both studies found that inflation had a positive and significant impact on relative price, further supporting the menu cost theory. However, neither study measured the impact of different aspects of inflation on relative price than other researchers. They only associate relative price with changes in inflation rate and inflation rate.

Low rates of inflation From 1985 to 1987, Malaysia was having a low inflation recorded. The benefits of low inflation are higher growth rates, while low inflation is due to the policy mix incorporated by the Malaysian government to strengthen the economic growth. When Malaysia's economic performance declined and plunged to -7.4% in 1998 and inflation was around 1.7%, the opposite deduction could be made. (Cheng and Tang, 2000). However, this has become the norm over the past 6 years, therefore contradicts the notion that there is a unilateral link between economic growth and inflation. Moreover, it is importance that Malaysia's economic growth is volatile and shows different patterns that contradict assertions that there is a link between inflation and economic growth. This means that economic growth reacts differently when changes in inflation.

DISADVANTAGES Fall in real wages According to Korn Ferry's 2019 payroll forecast, real wages in Malaysia are expected to grow by 3.6% in 2019, slightly higher than last year's forecast of 3.5%, with adjusted inflation at 1.4%. The survey showed that the median base salary is expected to increase, with the telecommunications and media sectors expected to post the highest increase in 2019, up 0.4 per cent to 6.0 per cent. Moreover, the insurance and oil and gas sectors are expected to have the smallest median increase in basic wages, up 0.2 per cent from 5.4 per cent and 4.2 per cent respectively. The industrial products sector is the only exception, as the median base wage is expected to fall by 0.2% to 4.9%.

High cost living An increase in the cost of living hurts families and makes them poorer. The harm caused by inflation is more subtle because it makes future plans more difficult, making it detrimental to saving spending and investment and weakening the real value of cash and other assets with fixed nominal value. This is because the inflation tend to become more variable, it increase uncertainty, reduces market efficiency and slow down the economic growth. At the same time, the effect of inflation are the same for everyone, but changes in the cost of living vary

from place to place or person to person. If the inflation shrinks the account unit of 5%, the real value of everything will fall by 5%. In other word, the changes in the overall price of goods and service will affect people’s living costs in different ways.

Uncompetitive economy Malaysia’s inflation rate has slowed as world inflation has intensified. Therefore, from 1985 to 1987, consumer price index grew by less than 1% of growth rate for the following next 3 years. The deceleration of CPI growth large reflects the impact of weak demand, as the prolonged world recession has severely affected export earnings, and the private sector wide incomes. (Ministry of Finance, various years).

Korn

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Retrieved from: https://www.thestar.com.my/business/business-news/2019/01/17/korn-ferrysees-3pt6pct-rise-in-real-wages-in-2019/#F56UIpq585gULZzD.99

Abdul Karim, Z., Shah Zaidi, M. A., &Jusoh, M. (2008).

Relative price variability and

inflation: empirical evidence in Peninsular Malaysia, Sabah and Sarawak. International Journal of Management Studies 15(2), 165-182.

Ministry of Finance, Economic Report, various issues, National Printers, Kuala Lumpur....