Factors that Influence the Inflation Rate in Malaysia

Amir Imran Zainoddin,Jamilyn Rasyeeda Ahmad Taslim,Liya Fitrya Nin,Haida Kamelia Md Kamal,Najihah Yusof

doi:10.6007/ijarbss/v11-i9/10838

Amir Imran Zainoddin, Jamilyn Rasyeeda Ahmad Taslim + Show 3 more

Open Access

https://doi.org/10.6007/ijarbss/v11-i9/10838

Copy DOI

Abstract

Maintaining a low and steady inflation rate has become one of the challenges in most nations. Many factors have contributed to Malaysia’s inflation rate over the last few years, and it can be either economic or external factors. As only a few current studies have been discussed on this topic, this paper is primarily interested to examine the factors that affect the inflation rate in Malaysia from the year 1991 to 2020. The study also looks into whether the factors of inflation play a role in the changes in Malaysia's inflation rate. Hence, the independent variables that were chosen are economic growth (GDP), government expenditure (GE), exchange rate (ER) and unemployment rate (UNEMP), while the inflation rate (CPI) is the dependent variable. This paper utilized the Ordinary Least Squares (OLS) regression method to determine the significance of independent variables in causing inflation. The data for this study were collected during 30 years from the World Bank and Thomson Reuters DataStream. Overall, the results have found that ER, GE and UNEMP has a significant relationship with inflation in Malaysia. Interestingly, the study revealed that no significant relationship between economic growth and inflation during the period of study. Therefore, the outcome of this study implies that future research should employ the threshold model and Autoregressive Distributed Lag (ARDL) models approach to obtain accurate conclusions on the impacts of economic growth on inflation. In summary, this study will assist the policymaker and the government to control the inflation rate by tightening the monetary policy and implementing the fiscal policy.

Highlights

Inflation is a rise in the cost of goods and services purchased by households
The R2 value of 0.836761 implies that 83.68% of the dependent variable (CPI) variation is explained by the independent variables namely economic growth, unemployment rate, government expenditure and exchange rate while other factors are not included in the study account for the remaining 16.32%
In conclusion, this study attempts to find the relationship between the unemployment rate (UR), economic growth (GDP), government expenditure (GE), and exchange rate (ER) with inflation in Malaysia has been examined with the annual data covering 1991 to 2020

Summary

Introduction

Inflation is a rise in the cost of goods and services purchased by households. Inflation is known as the percentage rise in the Consumer Prices Index (CPI) from year to year (Marya et al, 2014). A high inflation rate means there will be a rise in the cost of the material. Lower inflation leads to slower economic growth and eventually will lead to recession and a high unemployment rate. According to Munir and Mansur (2009), a lower inflation condition is essential for economic growth. The most well-known indicator of inflation is the Consumer Price Index, which is calculated by the per cent rise in the Consumer Price Index (CPI) from one year to the next. Malaysia's annual inflation rate has consistently been around 2.9 per cent except for the last year (Islam et al, 2017)

Objectives

Methods

Results

Conclusion