LETTER | There is no free lunch in inflation management

LETTER | For the first time in a long while, I finally came across an economic minister who could talk about economics that I can relate to. I am referring to Economic Minister Rafizi Ramli’s statement on the “collective effort” to battle inflation. 

True, there are supply side and demand side to inflation problems. When inflation is raging, usually we need short-term measures to control prices from escalating further. However, short-term measures are not as effective as medium to long-term measures.

Hence, while we are now faced with a “house on fire” situation, it is essential that the government does not lose focus on medium to long-term measures as well. Only sustained and sound macroeconomic policies can put the economy on an even keel. 

Our present inflation problem is not just due to supply disruptions such as floods, the Covid-19 pandemic, or the war in Ukraine. No doubt these events affect the supply side enormously. However, if our economy is strong and resilient, the adverse impact may not be as harsh as what we face today. 

For too long, we let income disparity widen. For too long our market economy is saddled with and constrained by monopolies, bureaucracy, and meaningless regulations. For too long, government spending has been inefficient and ineffective in generating outputs and creating productive capacity. 

So yes, we must take quick actions to facilitate supply-side disruptions like allowing freer imports and taking measures to enhance the supply chain from production to consumption.

We have had agencies like the Federal Agricultural Marketing Authority for umpteen years, but I think the problems of middlepersons, distribution, and transportation are as real today as it was first highlighted by the late economist Prof Ungku Aziz.

While taking immediate measures to resolve the crisis at hand, we must not lose sight of finding medium- and long-term solutions. For a long time now, we have been talking about anti-competitive behaviour in our marketplace. 

Cartels, monopolies, approved permits, restrictive licensing, et cetera are the common complaints and features of our economy. I believe many of these phenomena are intertwined with corruption and cronyism between vested interests and public officials. 

Finally, I still believe what Milton Friedman famously said, “inflation is a monetary phenomenon. It is always and everywhere, a result of too much money, of a more rapid increase in the quantity of money than an output”.

We complain about inflation, but if we have too much money in our pocket, we will continue to buy despite the increase in prices.

How much money has the government created since the Covid-19 pandemic?  And what about fiscal pump priming? How much has the government spent that led to very little increase in outputs and productive capacity of the economy? What about government borrowing, from inflationary or non-inflationary sources?

Price stability is a macroeconomic issue. It requires discipline and the right monetary and fiscal policies mix. There is no free lunch in inflation management.

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