More to high prices than consumer behaviour, economist tells Rafizi

An economist has called for sound "economic reasoning" as Malaysians continue to grapple with the rising price of household goods, saying inflation is rooted in more than just consumer spending following recent remarks by the government against a backdrop of a stagnant inflation rate. 

Economy Minister Rafizi Ramli had said that demand should go down when prices increase. 

"Demand has not gone down despite rising prices, particularly in the foods and non-alcoholic beverages category, which is also the main driver of the consumer price index (CPI)," Rafizi said at a press conference last week.

The Pandan MP also said that "by right, when the price of chicken increases, people should avoid buying chicken", although he later said on Twitter that he had been referring to "the need to address the supply and demand side so that a more elastic consumer demand becomes a force to reckon with in influencing the price of goods".

The CPI is an indicator of change in the cost of purchasing certain goods and services. 

Rafizi's remarks came as the statistics department revealed that the inflation rate for last month had remained at 4%. 

Carmelo Ferlito of the Centre for Market Education however said that the inflationary pressure in the market and the spike in prices of goods was driven by the expansion in fiscal policies taken by the government over the last few years. 

Speaking to MalaysiaNow, he said the current inflation was due to an excessive amount of money in the market following the implementation of relief packages to the tune of RM305 billion in 2020 and RM225 billion last year. 

While private consumption rose by 1.9%, he said, government consumption grew by 6.6% in 2021.

"While we understand the aim of shaking consumers with these statements, we also believe that the ministry could send out strong messages without compromising the accuracy of economic reasoning," he said.

He also said that the impact of monetary expansion could not be fully seen in CPI behaviour due to deflationary pressures. 

"At the producer price level, instead, the increase is higher not only because of supply-side shocks, but because production prices anticipate what happens at the consumption level," he said. 

Malaysians have been struggling to keep pace with the increase in prices attributed, in part, to disruptions in the supply chain due to the Covid-19 pandemic as well as Russia's military operation in Ukraine. 

In April, the price of chicken hit RM10 per kg.

Carmelo said Rafizi did not appear to have considered the concept of elasticity in his remarks.

"When the price of goods increases, individuals and businesses will buy less. But how much less? A lot or a little? 

"The minister mentioned the case of food, ignoring that elasticity of demand tends to be low – a minimal reaction of the quantity demanded in front of price changes – for goods which are necessities and with fewer substitutes, in particular in the short-run.

"Adjusting consumption habits takes time," he said.