Global Inflation

Global Inflation

1 litre of petrol MYR1.62 in 2005, today price MYR2.70, 66% increase.
Wantan mee used to be MYR2 per bowl last 2 years, now it is MYR2.5, 25% increase.
Roti canai used to be MYR0.5 last year, now it is MYR0.8, a remarkable 60% increase.
My salary MYR3000 increase only MYR200, a mere 7% increase.

That is how it is today, our wage cannot catch up with the inflation rate. We get lesser and poorer. Malaysia Domestic Trade and Consumers Affair Ministry revealed that the core inflation rate in 2007 is 3.2%. Wow, how consoling!!! If so, why is my salary not enough to cover my expenses? Sadly because inflation rate is derived from personal consumption expenses without taking into account of energy and food prices, which in truth, are the principal factor affecting our livelihood.

The Malaysian struggle

In the 12th General Election last 3 months, the Opposition coalition clearly highlighted the plight of of the general public in their campaign's motto:

BN = Barang Naik (Commodity increase)
Bila Naik? (When increase)
Baru Naik (Just increase)
Berapa Naik? (How much increase)
Banyak Naik (Very much increase)

While people struggle to make end's meet, government are moving the end with countless corruption and wastage cases, ranging from MYR 1 million bus stand to MYR 4 billion Port Klang Free Zone scandal. Government controls the country money supply. When money supply overflows, its value depreciate, inflation rate rises. When the government do not have enough money, they print more money to fund projects in developing the country. Inflation is a price we pay for growth. If these money are drained to corruption, inflation rate rise without development, we paid for nothing.

The Worldwide Inflation Trigger

In September 2007, the subprime mortgage bubble burst, jeopardizing the entire financial market in the United States. Major financial institutions faced billions dollars of writedowns every quarter. Banks were short of money, and liquidity was a major key for survival. Economy suddenly makes a sharp turn into a speculative recession. Federal Reserves stepped in to rescue financial institutions and pumped in billions of dollars. In broader view, the Federal Reserve need not only save their banks but also their people who are surrounded with debts and higher interest rate. Foreclosures were rampant and turning certain areas into ghost town such as Cleveland, Atlanta and Denver.

The ultimate solution - Interest rate

Since mid-September, the Fed has started cutting interest rate slowly from 4.75%. In March, its pace quickened, cutting a full 125 basis points in 2 weeks. To date, it has cut 3 percentage points in total.

While it is saving its nation from a possible recession (although Warren Buffett thinks it is already in a recession), it is killing other nations. As the US dollars weaken, investors sell dollars and buy other currencies as well as commodities such as oil as hedge. That is why other currencies are getting stronger and commodities such as oil is fetching a staggering USD 135 per barrel (as of June 2008), doubled the oil prices the year before. Higher oil prices has directly hurt the auto as well as air transportation industry, and triggered a ripple effect such as a significant rise in food prices.

Chinese inflation

The global economy climate can be categorized into hot, cold and ideally warm. China is exactly in the middle of a very hot climate recording 11% GDP for the past 5 years, and the government is striving to cool it down. One would probably be confused as to why the government should cool a growing market. Isnt growth a good thing?

Growth is a good thing, but too much growth will be like too much sugar in your coffee. Global and inland demand of made-in-China goods has rightfully earned China the name of the "World's Factory". With opportunities flourishing, the rising capitalism are earning more to spend. With demand rising, prices of goods rises, and people will demand higher wages, and they buy more things, factories keep on making more and more goods - the scenario of a hot economy. However, when the heat reaches a point (no one can be sure where and when is this point) where people stop buying goods because of high prices, inventories overflowed the warehouse, factories closed down, and people loses jobs - the country goes into an economic downturn.

To prevent from reaching this point, the government will have to take measures to cool the economy, usually by dissuading the banks from loaning money with a higher interest rate. In the past, such implementation will cool the economy rather effectively, but with the current situation in the United States, it is of miscroscopic effectiveness. Hot money, a term coined to describe direct foreign investments in a substantial amount. It is akin to a shop with a lot of customers rushing in to snap up everything in your store, people come to shop and buy your currencies, your stocks, your futures, and your properties. Suddenly, you will have so much money and liquidity. To date, China has USD 500 billion of hot money. Contributing to the influx of hot money is the undervalued Renminbi.

Hedge fund managers are buying the Renminbi and properties in wait for a revaluation. With such substantial demand and liquidity, the Chinese businesses continue to build more and sell with higher prices.

Inflation exacerbated in January, when snow storms struck the Southern part of China, disrupting commodities transportation, and dwindling food supplies with many farms and livestocks were affected by the harsh weather. Pork prices rose 63% and vegetables 46%. In February, China recorded an inflation rate of 8.7%, higher than expected. Furthermore, another setback which shook the Sichuan province, 7.9 on Richter scale, took more than 70,000 lives. With a situation possible to worsen with flood, the country is struggling to maintain its food supplies, and rescue its people out of poverty in the rising inflation situation, when they have everything destroyed by natural disasters.

How can we survive inflation?

Inflation is like an epidemic spreading across the globe. However, some countries seems to have a stronger immunity against the rising inflation rate. Japan, has recorded a near 0% inflation rate for recent years. With competition among businesses remaining strong, raising prices may not be an option, in fear of losing goodwill amongst customers.

Inflation and high living cost does not have to be in tandem. For example: In Singapore, as their gas prices gets higher with the world's gas prices, the increase does not translate into higher living cost to most of their citizens, as most of them, do not rely on cars to travel. In Malaysia, one fourth of their income would be spent on gas prices. Shall there be a well-networked and reliable transportation system in Malaysia, rising gas prices will be irrelevant.

I was in the United States a few weeks ago, and it is true that, the rising gas prices is eating away their income, with it coming to USD4 per gallon. Converted, it would be USD1 per litre. But the average citizens do not find too much trouble dealing with it, as their income for an electronic design engineer, earning USD3000 monthly. Paying a mere USD 1 litre is not so much of a problem. In Malaysia, you earn MYR3000, paying a hefty MYR2.70. Comparing apple to apple, orange to orange, the (income per capita / daily neccesities expenditures) ratio is higher in the United States compared to Malaysia.

In conclusion, it is either you be in a country with low inflation rate, or a country which insulate itself from inflation with improved alternatives, or a country with a high income per capita and low daily expenditures, you are unlikely to be able to beat the surging inflation rate.
Once a Malaysian Member of Parliament said: "If you dont like it, get out of Malaysia."
Well, now we can hardly survive, perhaps it is time!