Malaysian Economy: Cost-push inflation and Stagnation at the same time

I regularly scan foreign news reports on Malaysia and spoted this statement here, by Second Finance Minister Nor Yakcop. This report is actually about this Minister's appearance on TV3's The Exchange which I had earlier missed.

This particular statement on the right caught my eye and I was quite taken aback by this ridiculous lie of the Government 'having done all we can' to fight inflation. In the first place this hyperinflation (where inflation goes out of control with prices of goods doubling or trippling in a short time) which started in June 2008 was caused by the Government's stupid fiscal policy of increasing fuel price by 40%. It's of course cost-push inflation- the Government pushed the cost up and did nothing effective to repair this economic blunder. If the Government is sincere and 'have done all they can in fixing the economy, fuel price should have been dropped further immediately when crude oil prices started to fall.

Er- cost-push inflation not as serious as demand-pull inflation??! In my professional opinion, both are equally dangerous if not addressed properly. Cost- push inflation is caused by the sudden decrease in the supply of an essential item and/ or the sudden increase in prices of an essential item which is so substantial and rapid that it shocks the economy and chain-effects the other items causing their prices to rise as well. The situation can happen so rapidly that supply of the said item(s) cannot be expanded in time ; or suppliers of those items have their hands tied behind their backs preventing them to act to increase demand so as to adjust the market price. The perfect example is our 40% petrol price hike in June. On the other hand demand-pull inflation happens when total demand exceeds total supply in the economy caused by needs of consumers. The suppliers cannot supply the needs of its customers thus causing the scarcity in supply of goods; which in turn increase prices, thus called 'demand-pulled'.

If I were managing Malaysia's economy I would not want to focus inflation alone. That's because Malaysia is on the verge of an economic situation called stagflation- the combination of inflation and economic stagnation. Instead of one enemy we have two now- inflation and stagnation happening at the same time. The sudden surge in petrol prices in June 2008 caused cost-push inflation which sent out a signal to the general public not to spend more, be conservative,etc. The Government's fiscal cut of RM2 billion in Ministers' entertainment and claims allowances in June 2008 was one loud signal to spend less. The impact of such fiscal measures was almost immediate- economy growth slowed down immediately- suddenly we are not talking about the forecast growth of 6-7% but a below 5% economic growth. Business are now faced with low demand (stagnation of revenue and growth) and the rising costs of doing business (inflation), hence the term stagflation. If we continue to run a business in this situation, employers will have to lay-off workers in order to curb falling margins. Eventually, the businesses will also go under the lack of sustainability.

This country is run by amateurs... the Finance Ministers does not appear technically sound even in the most basic economic principles. We had better remove them, one way or another.