LETTER: High levels of inflation could adversely affect economic performance as greater cost of goods and services erode profit and consumption.
Inflation reduces purchasing power, raises prices of goods and services, lowers the value of the domestic currency and brings much uncertainty to the economy.
According to the World Economic Outlook, globally, the annual world inflation level is projected to rise to 3.5 per cent this year from 3.2 per cent last year.
The Consumer Price Index (CPI) in Malaysia rose 2.2 per cent last month compared with the same period last year. From January to July, the CPI increased 2.3 per cent compared with the same period of the preceding year.
The increase in CPI is mainly due to the heightened oil prices following the uplift of benchmark Brent crude oil prices to a peak of US$60.56 per barrel on Feb 8 this year, compared with less than US$50 in December last year.
The increasing inflationary uncertainty following the setting of RON95 petrol and diesel ceiling prices at RM2.05 and RM2.15 per litre, respectively, since February as compared with the average of RM1.69 and RM1.85 in July last year should not be ignored.
The inflationary pressure could arise because of higher prices of goods and services, shortage of supply of raw material such as automotive chips and soaring shipping costs due to the supply chain bottlenecks.
Increase in CPI heightens the inflation risk, which, in turn, brings uncertainty to investment returns.
Though it seems unclear whether there will be another policy rate cut to promote economic activity, heightening inflationary pressure does pose a challenge to monetary policy.
At this stage, an effective risk management plan is crucial to buffer inflationary pressure.
Corporations and investors need to be prepared and act proactively to cushion against the risk of rising costs of financing if the central bank adopts a contractionary monetary policy to combat inflation.
TAY BEE HOONG
Senior lecturer, Faculty of Business and Management, UiTM, Segamat, Johor
The views expressed in this article are the author's own and do not necessarily reflect those of the New Straits Times