1. Consumer price index (CPI)
The one effect most people are aware of is CPI – the measurement that calculates if your income is unable to sustain you through rising prices and thus, lowering your standard of living. The most obvious change in our nation that might affect the average consumers’ CPI would be due to the decision to adopt a floating price mechanism for RON95 petrol and diesel – causing uncertainty as to just how high transportation prices might rise.
This will ultimately lead to an increased cost of living because of lower purchasing power.
Following the principle of causality (cause and effect), inflation and eroding purchasing power go hand in hand. A simple example of this comes up in our day to day conversations when you hear, “Back in my day, I could buy a bowl of mee for 20 cents!”. Meanwhile, recent news indicates that we have managed to expand our “economy to 4.6% this year without a sudden increase in the prices of goods and services”, with a yearly core inflation rate that has been less than 2.6% since mid-2016. Can we maintain this momentum through 2020?

2. Sudden spending
As odd as this may sound, there is the logic behind spending more when faced with the possibility of lower purchasing power. Think of it this way – back when petrol prices were on the float, there were long queues at petrol stations the day that the next month’s prices were announced as people rushed to fill their tanks up to save that extra RM0.05 per litre. Or, similarly, buying all the makeup you will need for the next year when the store is advertising a “20% off on all items” sale. Uncertainty about the future price of good and services mean that consumers are more likely to indulge in speculative investments. They would want to spend more while their money is still worth as much as it is, instead of keeping it until it is worthless. However, this sudden injection of cash flow into the economy – when the economy might not even need it – could result in hyperinflation; a cycle of spending, further lowered purchasing power, and more spending.

3. Debtors benefit, creditors get the worst of it and banks step in
Attributable to inflation is also the cost of borrowing. Because tomorrow’s money is not worth as much as yesterday’s, the loan that you’d taken out 2 months ago will also depreciate in worth – meaning that debtors will be paying back less than what they borrowed (in terms of value). However, this is between two people. When it comes to loans from the bank, inflation means that there is a need to either increase (booo!) or decrease (yay!) interest rates. However, there is a trend of borrowing to alleviate current monetary issues like the lack of sufficient income to channel money into their personal financing and motor vehicles. If the current trend continues, almost 40% of lower-income borrowers (with a household income of less than RM3,000) will be left with nothing to save. Watch out for borrowing during times of moderate to high inflation – especially if it is borrowing for consumption rather than for wealth accumulation.