The Root of Inflation

Economists generally categorize inflation into 2; cost-push inflation whereby cost of main driver of good and services increases and demand-pull
inflation, whereby there is just too much demand for the goods and services, so producers increase prices to rake in better profits.

Most of us would readily identify the first cause in our current situation, ie the the price of oil in the world market increased substantially, which lead to chain effect down the production sector of the economy. If this was just before the WW2, it would not matter so much. Oil was not the main driver of production cost back then.
Lets just accept the fact that there is nothing much we can do about the price of oil in the world market. We all know that the current high prices of oil is achieved through increasing demand from newly rich economies of China and India as well as rampant speculative betting by investors in the market.
Just because our country produce oil, doesnt mean that we can demand to get subsidized petrol for years to come. What if we dont have oil, like what it was in the sixties?

Now, lets remove oil as a factor in Malaysian economy, and consider inflation.

Some of us would admit that there are elements of demand pull inflation. Next time we go to the 'pasar malam' check how traders sell their vegetables, ready-to-eat food and fresh food. How brisk is their business?
We would notice that people are more affluent these days compared to say, 10 years ago. Driving cars to work is normal, not motorbike or bicycle. Malaysia economy shift from agriculture based 20 years ago to manufacturing and services. When people get richer, they consume more, and a substantially higher portion of this consumption is on food. Notice too that obesity and 'wealthy diseases' like high blood pressure, diabetes is becoming more prevalent even in villages. So the demand for basic food has increased substantially. This is the demand pull inflation.

this article from www.bbc.co.uk
Consumer inflation 'could top 4%'

How one family is having to cut back in response to rising food and petrol prices
Rising food and energy prices could push UK consumer inflation above 4% this year, the governor of the Bank of England has warned.

He was speaking after the Office for National Statistics (ONS) said the Consumer Prices Index (CPI) rose by 3.3% in May, up from 3% in April.

This is the fastest rate since the CPI measure began in 1997, the ONS said.

The wider Retail Prices Index measure of inflation rose to 4.3% from 4.2% the previous month.

The biggest contributor to consumer inflation was the rising price of food and non-alcoholic drinks, the ONS said.


This was mainly due to the increasing cost of meat products, particularly bacon, and vegetables.

Increasing household energy bills were also a significant factor, along with the rising cost of books, stationery and foreign holidays. However, this rise in the cost of leisure and recreation was offset by a fall in the price of DVDs, according to the ONS.

'Considerable uncertainties'

If inflation rises more than one percentage point above the government's 2% target, the Bank of England governor must write a letter to the government to explain what action it is taking to control consumer prices.

In his letter to the chancellor, Bank of England governor Mervyn King blamed sharp rises in the prices of food and energy for the increase in the rate of inflation.

He also suggested that prices will rise at a faster rate in the coming months. DEAR MERVYN...

To return now to inflationary pay settlements would undermine rather than raise people's living standards

Chancellor Alistair Darling




"As things stand, inflation is likely to rise sharply in the second half of the year, to above 4%," Mr King told the chancellor.

"I must stress however, that there are considerable uncertainties, in both directions, around this, and any such projection is particularly sensitive to changes in domestic gas and electricity prices," he said.

Mr King has had to write such a letter to the chancellor only once before, when inflation hit 3.1% in April 2007.

The governor said that the rate of inflation should peak towards the end of this year, as long as there were no "unexpected increases in oil and commodity prices".

Should the UK avoid severe external shocks, then the rate of inflation will begin to fall back towards the 2% target next year, Mr King said.

In reply, Chancellor Alistair Darling called for "restraint" in pay rises awarded in both the public and private sector.

"To return now to inflationary pay settlements would undermine rather than raise people's living standards, with a damaging circle of wage increases eroded by steadily increasing prices," the chancellor said.

Economic slowdown

The higher-than-expected rise in consumer price inflation has transformed expectations for interest rates, according to the BBC's Economics Editor, Hugh Pym.



The global nature of these price changes is evident in inflation rates not only in the UK, but also overseas




Confident talk of two or more cuts in borrowing costs from the present level of 5% has been replaced by forecasts of unchanged or even higher rates in the months ahead, our editor says.

Mr King and his colleagues are unlikely to cut interest rates further until they are convinced that the inflationary threat has passed - despite pleas from those struggling in the housing market.

However, analysts warn that raising interest rates to curb inflation could dampen an economy already dented by slowing growth and the weakening housing market.

"The key factor [deciding the direction of interest rates] will be whether increased inflationary expectations feed through into greater wage demands and second round effects – at the moment average earnings growth is stable, but the MPC will be watching it closely through 2008," said economist Charles Davis from the Centre for Economics and Business Research.

Passed on



Consumers and companies around the world have been feeling the effects of higher energy and food bills.

"The global nature of these price changes is evident in inflation rates not only in the UK, but also overseas," Mervyn King said.

In the past 12 months, world agricultural prices have increased by 60% and retail food prices by 8%, the governor said.

Oil prices have nearly doubled over the past year and on Monday the price hit a fresh high of almost $140 a barrel in New York.

Wholesale gas prices are up by about 160% in the past year and UK household energy bills have risen by about 10%.

Those increases have prompted many people to rein in their spending in other areas.

Current Issues: Inflation

Normally Central Banks would use its 'tools' to counter inflation, ie raising interest rate. Why?
Higher interest rate would dampen investment and the demand for money. People and businesses would simply park their money in the bank and earn interest instead of borrowing money from the bank to invest in economic enterprise, like starting a small business or venture. So the theory goes, with less investment, there will be less demand for goods which leads to lower inflation in the near term.
M3, the money in circulation would also contract. People would feel less rich, and hence spend less. This would dampen GDP growth, and sometime may lead to economic contraction (recession).

Is inflation that bad? What does inflation means to ordinary people, and to businesses?
To ordinary people, inflation means rising prices, caused by high demand for goods with limited supply. To businesses, inflation means passing on the cost and higher profit figures.

Inflation dangers 'threaten Asia'

Rising food prices could lead to spiralling inflation in Asia
The threat of high inflation remains a major worry for Asia, and could undo the progress made in the past 20 years, the Asian Development Bank (ADB) says.

ADB managing director Rajat M Nag said inflation in 2008 would exceed the 5.1% annual figure predicted in April.

Rising fuel and food prices were the chief dangers behind inflation that affected Asia "good growth story".

Rising inflation could also hit investment and corporate earnings, and destabilise governments in the region.

In Asia, roughly about a billion people are vulnerable to the food and fuel price increases

Rajat M Nag, Asian Development Bank

On Friday India said its inflation had risen at its fastest rate in seven years. And earlier in June South Korea said its inflation had hit a seven-year high as a result of rising energy and food costs.

In Vietnam inflation is more than 25% and the government has said the issue is the biggest challenge it faces.

Singapore, Thailand, and the Philippines and Indonesia are facing inflation rates of between 7.5% and 11%.

'Regressive' taxation

The ADB has forecast 7.6% growth for the region in 2008, down from 8.7% in 2007, which was the highest in two decades.

Mr Nag said Asian monetary and fiscal authorities should "recognise inflation as a very major concern" and indicated that raising interest rates could be one solution.

Inflation "can endanger growth in Asia," he said, adding that "central banks should take all steps, including looking at rates as what India has done quite appropriately."

On Wednesday India's central bank raised a key short-term borrowing rate by a quarter percentage point to 8.0%.

Rising food prices have been spurred by rising fuel costs that have increased production and transport costs.

Loans offered

Asian nations such as India, Malaysia and Indonesia recently cut fuel subsidies in the face of rising world oil prices, which may send inflation even higher.

"Inflation is the most regressive form of taxation and it hits the poor most. In Asia, roughly about a billion people are vulnerable to the food and fuel price increases," Mr Nag said.

He said governments had to ensure "targeted cash support" for the poor to protect them from the price increases, he said.

Asia is home to two-thirds of the world's poor. It cut its poverty rate to about 19% from 33% in 1990, but Mr Nag said this improvement was under threat because of inflation.

In April the Asian Development Bank offered to support countries dealing with the effects of rising food prices.

It said loans could be made available to countries so that they can subsidise the price of staples to help the poor.

Cash Rebate and Spending Cut: Too little too late.

Never too late you say?
All I can say is that it looks like that the Govt is in crisis mode. Announcing rebate to be brought forward doesnt mean anything much, it doesnt even quell public anger. Bring forward the rebate doesnt do much to our income expectation, its still the same at the end of the year. Its a small drop indeed. As for the announcement of RM2billion spending cut, it means nothing. Thats like saying you are not going on holiday next month, because there is no money.

Well, there never was any money anyway!

The report in Malaysiakini come in late, or was it timed with Berita Perdana at 8pm?

Indeed the Govt is in crisis, not much money left, and in danger of losing control. Too much money has been wasted in the past few years subsidizing petrol in an effort to control inflation. Too much money wasted on mega projects.

Since my posting 2 days ago calling for minimum wage legislation and national social welfare system, a few other people also start calling for implementing these.

READ this one here, also in Malaysiakini. Tony Pua of DAP also suggest the same thing. READ HERE.

Big question is, where we would get the money for social welfare system? I am afraid we have to print the money first, have higher inflation this year and that may deplete our foreign reverves considerably.

Oil Price Hike and Fair Income Distribution

Back to the issue of the week, oil price hike.

We shall accept that the oil price hike is largely external factor, that demand simply far exceed supply in the world. We just hope and pray that with this high price, it would spur research and development and change attitude of world citizens towards alternative forms of energy.

Nuclear, solar, hydro, coal and whatever. In fact I like the idea of nuclear energy to supply our energy needs. Look at Iran, they are working on it. Our competitiveness and our success in the future depends on our ability to secure cheap energy. In our case, we should look into solar, hydro and nuclear.

I accept the fact that we need to let the price of petrol and diesel to float to the world price. This is to reduce conspicuous consumption, even though we are a nation blessed with our own oil wells.

But our income from selling the 'Tapis light sweet crude oil' should be fairly distributed amongst our citizens, so that no one shall go hungry. So a portion of the nation income should be redistributed to the poor in our society. This is why I call for social welfare payment for the poor in my previous posting. The workers, those people with jobs, shall also be fairly compensated, hence minimum wage legislation, so that everyone shall be able to live with dignity.

I like Mufti Perlis latest posting touching on income distribution.

READ HERE

Yes absolutely true, that before the nation leadership call for the rakyat to 'ubah cara hidup' the Prime Minister, Raja-Raja and Menteri-Menteri must spend their wealth first and not wasting our nation's resources.

We should take example from the time of Khalifah Umar, that the Great Khalifah didnt introduce a law to control price of food, or any other life necessities. Not because the Great Khalifah Umar understand the concept of 'invisible hand' in economics, but because even during the time of Prophet Muhammad SAW there is no such thing as price control and state subsidy, be there petrol subsidy, or rice and sugar price control.

Its simply false economics, by having a law controlling price on certain food item like rice, chicken and meat, we are giving message to entrepreneurs and farmers not to invest in rice or chicken farming and production, its not profitable. So in the long term the price of rice would be high because of limited supply.

We have seen this is happening to the price of rice. Price of rice has always been controlled, that rice farming was not profitable in the past 30 years. Scores of rice farming lands left idle or converted to other uses like housing etc. Until such time that we dont produce enough rice to feed ourselves.

The same could be said with the petrol and diesel. True that we are oil producing nation. By keeping the price of petrol and diesel artificially low, we are 'gorging'ourselves, wasting to the point of nothing much left. It would be better if we sell petrol and diesel at market price, then redistribute the profit to the poor among us, that way we would only use what is necessary, nothing beyond necessity.

I am looking forward to the day when the Govt announce social welfare payment for the poor as a form of safety net and minimum wage legislation for the workers. I am looking forward for fair income distribution in the country.

Oil Price Hike and Inflation

Oil Price Hike and Inflation

There is so much unhappiness over the petrol price hike. Malaysiakini is full of report on demonstrations and protests. Some letter writer, like Dominic Pillai wrote good suggestion on subsidy for the low income group.

The glaring fact is, the current proposed rebate scheme does not alleviate the misery of low income Malaysian being hit in the pocket by this petrol price hike. True that it is done too hastily. When was it that Datuk Shahrir announce that Govt will increase the price of petrol to its full price in August and the price increase last week? Less than a week? Govt didn’t give a chance at all for wage earners to get their monthly salary and fill up their tank.
Two years ago, after the Govt increased price of petrol, I wrote to PM suggesting that the Govt remove petrol subsidy altogether. Two year is a along time, we have spent billions of ringgit already. Also don’t forget the billions of ringgit spent on mega projects. That money could be better spent on setting up a comprehensive welfare system for poor Malaysians to help them weather the inflation brought about by petrol price hike.

Now the Govt don’t have much in the kitty, unless we want to spend our foreign reserves of RM260billion. True that Petronas is profitable, and returning dividends to the tune RM40bilions last year. Question is, do we still have that money in the kitty?

Nevertheless, better late than never. I support Govt removing petrol subsidy.

Now what do we do to help the poor? Giving rebates to motorists means we are alienating Malaysians who doesn’t have motor vehicles who also feel the pinch of inflation.

As I said 2 years ago, Govt must take care of the welfare of low income Malaysians.

Minimum wage legislation.
This might take up to six month to study, write and put it through the parliament and passed into law.
This will spur the country forward to make more capital investment and increase per capita productivity, since employers would not employ employees to do low value jobs. It will also help employees on low income; higher income will ease their burden.

Social welfare payment (dole).
Social welfare payment for the poor, disabled old folks and pensioners, since their income are normally low and most of them cannot make end meet. Those people who are unemployed and have children to feed should also be included in this category. I would not elaborate further on this, since this should be included in our caring society concept adopted some time ago.

May I also suggest that the social welfare payment for main urban areas be set at RM1200 for two person household, (single person rate could be set at RM600) with increasing amount depending on the number of dependent in the household, e.g. RM100 for every additional child under 15 years old.
As for the minimum wage rate, I would suggest the rate is set at RM1200 for 48 hour week. That gives hourly rate of about RM5.70.

Why has the Govt throw away MTUC’s petition for minimum wage legislation to the rubbish bin? To protect the rich employers so they could continue reap huge profits? Its probably true that rich Malaysians make up the majority of UMNO lobbyists and backers. So it is not in UMNO interest to legislate minimum wage, which will dry up the political contributions.

This Govt also would rather spend billions of ringgit of useless projects so that the power brokers (read; UMNO to echelons) can farm out projects to cronies, who will contribute handsomely to some overseas bank accounts.

Ten plus years ago I heard Mahathir and Rafidah talked about ‘trickle down effect’. What a lot of crap. Still we voted these bunch into office.

Snow in June, Christchurch

The day started fine. It was about 15 deg C in the morning. no wind. Certainly a bit warmer than the day before.
Then dark cloud came from the south.
And rain.
Then everything went quiet. Not a sound of falling rain.
Then the snow falls.

Asyura is celebrated in my village for generations

picture from Faisal Tehrani.

I am writing this after reading Mufti Perlis Dr Asri's charge that Faisal Musa aka Faisal Tehrani 'berfahaman Syiah' as published in Malaysiakini.

READ HERE

Read the 'Bubur Ratapan Asyura' HERE

Also check Faisal Tehrani website HERE

Let us be clear that just because the man put a name of a city in Iran behind his name doesnt mean that he is Syiah.

Celebrating Asyura by eating 'bubur Asyura' doesnt make you a Syiah.

When I was a kid, the masjid in my village in Tanjong Karang celebrated Asyura every year, by, what else, eating Bubur Asyura together at the masjid. Afterwards the would be lecture from an invited ustadz on history or sirah of the Prophet Muhammad SAW.
I was also told that Asyura is also to remember the history of Prophet Nuh Alaihissalam. On the last days of the time when Prophet Nuh in the ship, there wasnt much food left, only a bit of this and a bit of that. So Nabi Nuh told his people to combine all the food that is available and cook them together into a porridge, hence Bubur Asyura.

One year there was a small group of Pakistani traders whom the masjid committee let them stay at the masjid. They asked, what celebration is this? Asyura, said Pak Imam Ahmad, as I remember. The Pakistani traders left the majlis and goes to sleep in their quarters behind the masjid.

You are not going to say that my villagers are Syiah are you?