Macroeconomics Assignment: Understanding Inflation Trends in Malaysia

This macroeconomics assignment provides an in-depth analysis of inflation, distinguishing between demand-pull and cost-push inflation. It focuses on Malaysia's economic scenario, particularly the increase in inflation during the latter half of 2017. The study identifies rising transport costs and increased prices of essential commodities, like food and non-alcoholic beverages, as primary drivers. The report attributes the transport cost increase to rising fuel prices, which correlate with increased global crude oil prices. The rise in crude oil prices increased production costs across industries, causing cost-push inflation. The assignment concludes that Malaysia's economic condition demonstrates high inflation, mainly cost-push, influenced by global crude oil prices.

Running head: MACROECONOMICS ASSIGNMENT
Macroeconomics Assignment
Name of the Student
Name of the University
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Table of Contents
Introduction................................................................................................................................2
Inflation: Macroeconomic Interpretation...................................................................................2
Case Study: Inflation in Malaysia..............................................................................................5
Cause of inflation in Malaysia...............................................................................................6
Conclusion..................................................................................................................................7
References..................................................................................................................................8

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Introduction
The global economic scenario has experienced huge dynamics over the years and the
economies in the world have shaped up considerably owing to the exogenous as well as
endogenous factors present in the global economic scenario. While the endogenous factors
affecting an economy refer to the occurrences and dynamics in the economy, the exogenous
factors refer to the occurrences and international phenomena occurring at different point of
time and having impacts on the global economic scenario as well as on the individual
economies of the affected countries.
The economic performances of a country over time can be analysed and interpreted
by observing the traits of the various macroeconomic indicators like the growth of the Gross
Domestic Product, the rate of unemployment, the inflation rate, the dynamics in the imports
and experts as well as the exchange rate dynamics in the country. The growth and economic
performance of the countries depend considerably on the working and dynamics of these
indicators (Burda & Wyplosz, 2013).
Keeping this into consideration, the concerned report tries to highlight and discuss
about one of the primary macroeconomic indicators, inflation and its implications on the
economic performances as well as the factors which lead to changes in the rate of inflation in
a country. To link the theoretical assertions regarding inflation, the report refers to the recent
increase in the inflationary situations experienced by the economy of Malaysia and tries to
interpret the causes which led to such increase in the rate of inflation in the country.
Inflation: Macroeconomic Interpretation
In the conceptual framework of economics, inflation is defined as the increase in the
overall price levels of the commodities and services produced and consumed in an economy
in a particular period. A rise in the rate of inflation in an economy, thus indicates towards an

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increase in the price levels of the commodities and services in the concerned economy as a
whole, while a decrease in the rate of inflation indicates towards a fall in the average price
levels in the country (Heijdra, 2017).
The phenomenon of inflation, can be broadly divided into two types, primarily
depending upon the causal factors behind the price rise in the economy as well as on the
nature and implications of the inflation on the economy as a whole. These two types of
inflation are demand-pull inflation and cost-push inflation, the causal factors and
characteristics of the same being discussed below:
a) Demand Pull Inflation- An economy often experiences an increase in the average price
levels of commodities and services due to an increase in the aggregate demand for the same
in the country, with the supply remaining the same or increasing at a rate less than the rate of
increase in demand (Ascari & Sbordone, 2014). This can be shown with the help of the
following figure:
Figure 1: Demand Pull Inflation in the economy
(Source: As created by the author)

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As is evident from the above figure, due to the increase in the demand, the price of the
products increases in the economy, thereby causing demand-pull inflation.
b) Cost Push Inflation- Often the prices of products and services in an economy increases
due to the increase in the cost of the inputs and resources required for production of goods
and services, which in turn leads to an inflation in the economy. This can be shown with the
help of the following figure:
Figure 2: Cost Push Inflation in the economy
(Source: As created by the author)
From the above figure it is evident that when the cost of inputs of production in an
economy increases, the supply of the goods and services tend to decrease, which in turn
increases the prices of the commodities leading to the creation of cost push inflation in the
economy (Woodford, 2012).

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Keeping these aspects into consideration, the following section of the concerned
report analyses the current economic scenario of Malaysia, which has been experiencing a
considerably high inflation in the recent times.
Case Study: Inflation in Malaysia
The rate of inflation in one of the emerging economies in the current global
framework, Malaysia, which had been moderate and decreasing in the first half of the
previous year (2017), started increasing in the second half of the year, which can be shown
with the help of the following figure:
Figure 3: Inflation rate in Malaysia (2017)
(Source: Data.worldbank.org, 2018)
The inflation rate in the country started increasing specifically post June and reached
to a six-months highest in September (Thestar.com.my, 2018). The primary reason for this
rise in the rate of inflation in the country is due to the increase in the cost of transports as well
as due to the increase in the prices of the necessity commodities like food and non-alcoholic
beverages.

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Cause of inflation in Malaysia
The primary reason behind the increase in the cost of transport in the country can be
attributed to the considerable increase in the fuel price which the country has experienced in
the concerned period, with the average price of a RON95 petrol increasing from RM1.70 to
RM2.20 in one year. The rise in the fuel price in the country can in turn be attributed to the
increase in the global prices for crude oil in the period under consideration, which can be
shown as follows:
Figure 4: Increase in the global crude oil price in 2017
(Source: Indexmundi.com, 2018)
The crude oil price in the global scenario, which decreased considerably till May and
June (2017), started increasing considerably post June and reached a visible high by
September (2017), which in turn raised the oil prices in Malaysia, thereby increasing the cost
of transport as well as the cost of food products in the country (Ji & Fan, 2012).

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As oil is one of the key components for the productivity in any industry, the rise in the
prices of the same has implications on increase in cost of production in all the industries,
thereby leading to a cost push inflation in the country.
Conclusion
From the above discussion it can be asserted that the current economic scenario in
Malaysia exhibits a trait of high inflation, especially of cost push type, which has been
primarily caused due to the increase in the cost of transport and food products in the country,
which in turn is a result of the increase in the price of crude oil in the global framework in the
current economic scenario.

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References
Ascari, G., & Sbordone, A. M. (2014). The macroeconomics of trend inflation. Journal of
Economic Literature, 52(3), 679-739.
Burda, M., & Wyplosz, C. (2013). Macroeconomics: a European text. Oxford university
press.
Data.worldbank.org. (2018). Inflation, consumer prices (annual %) |
Data. Data.worldbank.org. Retrieved 9 April 2018, from
https://data.worldbank.org/indicator/FP.CPI.TOTL.ZG?locations=MY
Heijdra, B. J. (2017). Foundations of modern macroeconomics. Oxford university press.
Indexmundi.com. (2018). Crude Oil (petroleum) - Monthly Price - Commodity Prices - Price
Charts, Data, and News - IndexMundi. Indexmundi.com. Retrieved 9 April 2018,
from https://www.indexmundi.com/commodities/?commodity=crude-oil&months=12
Ji, Q., & Fan, Y. (2012). How does oil price volatility affect non-energy commodity
markets?. Applied Energy, 89(1), 273-280.
Thestar.com.my. (2018). Malaysia's Sept inflation at six month high - Business News | The
Star Online. Thestar.com.my. Retrieved 9 April 2018, from
https://www.thestar.com.my/business/business-news/2017/10/20/malaysia-sept-
inflation-at-six-month-high/
Woodford, M. (2012). Inflation targeting and financial stability(No. w17967). National
Bureau of Economic Research.

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