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Inflation Demystified: How Economic Factors Shape Price Trends

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Inflation typically occurs during periods of sustained economic growth, where demand for goods and services exceeds the economy’s ability to produce them. There are several common scenarios that lead to the onset of inflation:

  1. Economic Expansion: During economic growth and development phases, consumers and businesses tend to spend more. Increased demand for goods and services can lead to price increases as producers try to balance market equilibrium.
  2. Loose Monetary Policies: The central bank/Bank Negara Malaysia (BNM) can implement loose monetary policies, like lowering interest rates or injecting money into the economy. This excess liquidity often stimulates spending and borrowing, potentially causing inflationary pressures.
  3. Supply Chain Disruptions: Disruptions in the supply chain, whether due to natural disasters, geopolitical tensions, or other factors, can limit the availability of goods and services. Reduced supply along with stable or increasing demand can lead to price hikes.
  4. Rising Production Costs: When the costs to produce goods and services increase, businesses may pass these additional costs on to consumers through higher product and service prices, causing inflation. This often occurs with increases in raw material costs or labor costs.

5. Energy Price Increases: Fluctuations in energy prices, especially oil, can have a significant impact on inflation. When energy prices rise, it increases production and transportation costs, affecting prices for various goods and services.

6. Government Fiscal Policies: Government actions, such as increasing public spending or reducing taxes, can inject more money into the economy, stimulating demand and potentially causing inflationary pressures.

7. Expectations and Psychology: Society’s expectations about future price increases can influence buying decisions. If individuals expect prices to rise, they may buy goods and services now, driving higher demand and causing price increases.

It’s important to remember that moderate inflation is considered normal and healthy for an economy, as it signifies economic growth. Central banks often aim to achieve a targeted inflation rate to maintain price stability and encourage sustainable economic development. However, when inflation exceeds a certain level and becomes too rapid or prolonged, it can pose challenges and risks to the economy and its participants.

Aliff Shanusi

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