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PETALING JAYA: To address the rise in prices of basic food items such as chicken and vegetables, Center for Market Education (CME) argued that price ceilings are not the solution to address the inflationary pressures.

“They will only make the situation worse, by creating less incentive to produce and therefore diminishing supply and keeping the inflationary tendencies high, impeding that readjustment of the supply which is very much needed to bring back the economy on track,” its CEO Dr Carmelo Ferlito (pix) said in a statement.

He stressed that this situation cannot be analysed outside of the context of mounting inflation around the world, where countries such as Germany and the United States are recording the highest inflation in decades.

Ferlito elaborated that there is a need to distinguish two main components in these new inflationary trends: the effects of supply-side shocks generated by lockdowns now exacerbated by rising demand due to the economic recovery, especially in the West; and the money supply growth outpacing output due to expansive fiscal and monetary policies implemented to face the effects of lockdown policies.

“While the nature of the first type of inflationary pressure can be temporary, the effects of the second type will remain with us for long,” he cautioned.

With the issue of monetary inflation, the CEO stated that not much can be done in the short run to tackle this severe and threatening component of inflation. He warned that an increase in interest rates now will only make things worse, as investments and confidence are needed to rebalance the supply chain.

“The only way to face this is for governments worldwide to embark in gradual, and yet painful, programmes of spending cuts.”

In regard to supply-side shocks, Ferlito said it is important to note that two years of lockdowns forced many businesses to scale down their operations. While it is easy and fast to scale down, it requires much more time to scale up again, a process which needs not only financial resources but first and foremost confidence in the future, a trust that new investments will not be frustrated by new lockdowns.

Moving forward, the think tank has recommended some measures to address the inflationary pressure: a stronger communication of a no-lockdown commitment alongside investment in ICU beds which is a critical element in lockdown decisions; and reopening the market to foreign works to ease labour shortage in the food & beverage sector, tourism, manufacturing and agriculture. It also called for the implementation of free-trade agreements and special commercial corridors to ensure that Malaysia has access to the supply of those products which are now in shortage and that contribute to push up agriculture prices.

“In a nutshell, it is clear that what we need is, again, less government intervention and more trust in market forces, rediscovering the importance of confidence, expectations, labour mobility and international trade,” Ferlito concluded.

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