The Negative Effects Of Inflation

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Inflation, a monetary phenomenon where the general prices of goods and services increase along with the decline in the purchasing value of money (Burdekin & Weidenmier, 2001). Over the past decades, the issue of inflation has existed in most of the countries and it has always been the major concern of the global society. In fact, economists viewed inflation as a double-sided issue as the impact resulted from inflation can be either positive nor negative. Since inflation eventually brings different consequences in the long-run and short-run, economists do not consider inflation as a completely bad issue to the economy. However, the inflation does not harm the economy if and only if the inflation rate remained at the figure between 3% to 4%.…show more content…
Based on their study, economic growth is negatively related to the inflation in the short-run while there is a positive relationship between inflation and economic growth in the long-run. In the short-run, a situation called the stagflation exists due to the high inflation. The situation of stagflation occurs when the high inflation causes the simultaneous high unemployment rate followed by a stagnant demand in the economy. During the stage of stagflation, the inflation rate is expected to be high in the future which leads to the higher inflation level and further causes the decline in the economic output. On the contrary, inflation has a positive impact on the economy in the long-run period. In the long-run, the expected inflation rate has been adjusted to the actual inflation. Thus, in the long-run, the inflation rate is relatively more stable than in the short-run period. In addition, inflation tends to encourage redistribution of incomes which increases the total savings. As mentioned by Datta and Mukhopadhyay (2011), the increase of savings which lead to the lower interest rate induced the rise in investment as well as the economic growth. Basically, the impact of inflation differs on the length of period and the level of inflation. However, if the inflation level is relatively high above the average rate, the impact resulted will…show more content…
However, the stable inflation condition does not hold long in the recent period. In the month of February in 2017, Malaysia inflation surged to the highest figure (4.5%) in nearly nine years since November 2008 which hit a 5.7% figure for inflation (World Bank). As mentioned by the economists, the rise of inflation was mainly due to the higher fuel prices. Regarding the increase in the global oil prices, the Malaysia government was currently adjusting the domestic fuel costs which induced the rise of inflation (Olukoya, 2017). In addition, the recent increase of inflation level was also contributed by the low base stemming from a cut in transport costs. However, the rising inflation did not urge the emergence of strong inflationary pressures as the central bank chose to maintain its policy rate (Olukoya,
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