How times have changed. The economic landscape of our nation has gone through spikes of uncertainty, instability, and irregularity. We’ve survived the tough, gradual fall of our gross domestic profit (GDP) from 7.4% at the start of the decade (2010) to an expected 4.5% in 2020. With a projected inflation rate of 2% in 2020, are we ready for the many effects of the possibility of inflation? Sure, inflation is not going to be as bad as it was in 2008 when it reached a high of 5.43%. Nevertheless, are we ready to deal with the “bigger picture” issues that are bound to come up? Let’s take a look at what could happen with inflation from the consumers’ and businesses’ point of view.
CONSUMERS
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.
BUSINESSES
1. Wages
The government is looking to increase purchasing power through various policies and grants to improve the current wage rate. From an RM200 to 220 increase in the minimum wage in the past two years to wage incentives for both employers and employees, the government is looking to control inflation and avoid breaking the 2% rate it is at currently. Because of the rise in inflation from 0.9% in 2019 to an expected 1.5% to 2% in 2020, companies are expected to have the flexibility to increase wages as their prices increase accordingly. As inflation has stayed ahead of wage increases for a while, morale has been low. However, as wages increase along with inflation – albeit not at the rate or amount employees might want – money that does not go as far is still money worth having.
2. Weaker demand; Slower Growth
In the same way that consumers spend more when they know that their money is going to be of less worth tomorrow than it will today, businesses are looking to see if it is time to take up more capital investments. How much, is hard to say, being an open economy with investors that have low confidence in its economy. This is marred by the trade war between the US and China as well as deteriorating export and growth prospects because of the slowdowns of major economies. Combine this with tighter fiscal policies to improve debt management and slower export growth as demand for crude oil falls and you have sluggish economic growth. As the economy continues to lose steam in the months ahead, proper management of productivity and output is necessary.
Why do we need to look at inflation’s effect on consumers? Because your results are your consumers’ results – you only do as well as they do. Stay on top of the economic headwinds and you will be able to navigate your way through 2020 with minimal loss.
