Deflation A Boon Or Bane For Malaysia

---

Following the outbreak of the Covid-19 pandemic, then echoed by an economic crisis, price levels have fallen, which resulted in what economists refer to as deflation
Deflation is defined as an overall decrease in price level so that the inflation rate becomes negative. It is generally not a good sign for the economy as it tells us about the state of demand in a country
According to World Bank data, apart from weak global crude oil prices, other global commodity prices such as agricultural products, raw materials and metals have fallen since February
In April, Malaysia’s inflation rate, measured by its consumer price index (CPI), remained in the negative territory with a drop of 2.9 percent from a year earlier (-0.2 percent in March). On a monthly basis, the inflation rate fell 2.7 percent compared with March
The sharp drop in prices was mainly hindered by transportation expenses (-21.5 percent) and spending on housing, water, electricity, gas and other fuels costs (-2.2 percent)
The downward pressure in prices is justifiable and has been expected since the movement control order (MCO) took place beginning March 18. It has adversely affected businesses and households. Another obvious reason is the low fuel prices
Weak consumer sentimentWould deflation be a boon or a bane to the economy given the unprecedented crisis
Seeing prices toning down should be a relief to the consumers as it would support purchasing power particularly during this trying time
For instance, weekly domestic pump prices remain low with RON95 priced at RM1.31 per litre, RON97 at RM1.61 per litre and diesel at RM1.45 per litre, effective from May 16 until May 22
It does not help that most people do not travel much these days because they are either working from home or they only drive at short distances to purchase necessities, and unnecessary inter-state travels are prohibited, those who have started travelling to work also get to save on petrol costs
Retailers are also putting in efforts to ensure their stocks are cleared by offering steep discounts, hence the very low prices
When it comes to prices, consumers tend to be sensitive. That is why some consumers have made complaints that the government is not prompt in controlling the prices of essential goods. For instance, Penang’s consumer association reported on the drastic increase in prices of coriander leaves, parsley and Chinese celery since the start of fasting month
As comforting as it is for several groups of consumers to witness prices going down, it might not be as accommodative for other groups of consumers. Why is it so
Due to the gloomy economy, many have lost their jobs or some have their salaries reduced. Therefore, falling prices do not help when people earn less or worse, having no income at all
Since we are currently clueless when the pandemic would end and businesses need time to recover, there is a possibility that deflation could last for a while as there will be less incentive to hire massively and because of the weak consumer sentiment
With low prices, business revenue would be lower. Despite the reopening of most economic sectors beginning May 4, consumer sentiment remains low as most will still be cautious about spending lavishly, thus affecting retailers
According to Malaysia Retail Chain Association president Garry Chua, only 20 percent of the normal shoppers have returned to shops, and they have become more restrictive in spending. He also noted that it is unlikely for the retail stores to reach 40 percent of customers in the next few months
This pessimistic sales projection shows that it would take time to rebuild consumer confidence and boost spending. Coupled with a cautious outlook for global oil prices due to its volatile nature, we could see low inflationary pressures or deflation continue in the upcoming months. Economists are already projecting deflation for this year
Businesses also need supportSo, can any measures be attempted to try to balance the deflationary pressures and Malaysians’ economic well-being
One of the ways to boost demand is for the central bank to further reduce the benchmark interest rate or known as the overnight policy rate which currently stands at 2.00 percent
This is possible given that inflationary pressures are low and downside risks to economic growth are still present. As stated by the central bank itself, Bank Negara Malaysia’s monetary policy stance is to maintain price stability while remaining supportive of growth
Besides that, the government also needs to constantly keep prices in check for the essential goods. By this, the implementation of a maximum price control scheme should not be done only during festive seasons but also during normal days while the economy is recovering
Not to forget, businesses also need support while consumer spending recovers. With the ongoing distribution of RM260 billion stimulus package, the government has to ensure the timely delivery of the package's stimulus mechanisms such as loan approvals for the Special Relief Facility (SRF) and the Micro-Credit Loan Scheme
There appears to be pros and cons resulting from the deflationary pressures experienced by the economy as a whole, households and businesses. Various measures, either direct or indirect, can be pursued for us to adjust to the current economic environment while monitoring the inflation development
NUR SOFEA HASMIRA AZAHAR is a research analyst at EMIR Research, a think tank focused on strategic policy recommendations. - Mkini

---