Knowing Your Money, Purchasing Power, Inflation and How it Affects the Food on your Table – Food Issue

Malaysia’s inflation continued to rise, with the consumer price index (CPI) rising 3.3% in June 2014 from a year ago due to higher prices for food, but the increase was within economists’ expectations. The Statistics Department said on Wednesday, the index for food and non-alcoholic beverages and non-food for June rose 3.5% and 3.2% respectively from a year ago.” [The Star Online: Malaysia’s inflation rate continues to climb, 16 July 2014]

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Image from http://www.malaysia-chronicle.com/

The inflation rate in Malaysia was recorded at 3.30 percent in August of 2014. Inflation Rate in Malaysia averaged 3.71 Percent from 1973 until 2014, reaching an all time high of 23.90 Percent in March of 1974 and a record low of -2.40 Percent in July of 2009. Food prices increased 3.3 percent year-on-year in August. Non-food cost also increased 3.3 percent, driven by prices of alcoholic beverages and tobacco (+ 11.6 percent); transport (+ 5.5 percent); restaurants and hotels (+ 5.1 percent) and housing, water, electricity, gas and fuels (+ 3.4 percent). These four groups of goods and services contributed 61.3 percent to the increase in the CPI for the month of August.” [Trading Economics: Malaysia Inflation Rate 1973 – 2014, last update: August 2014]

Economics is one chunky subject in which can be confusing. All we as individuals know is that we have no choice but to work for money in order to afford goods and services that will affect the food on our table. As the prices of goods and services continue to rise, we find ourselves struggling and our affordability shrunk – we are buying lesser items with the same amount of money given to us. The situation only spells our vulnerability of being in a disadvantage position.

To start off, let’s ensure our eyes are fixed in search for a big picture in order to make sense of what is happening to our economy. To do so, we need to explore these concepts we often hear from politicians, media, economists, and etc – money, purchasing power, inflation and learn how it will affects the food on our table. These videos will explain all in giving you some basic ideas.

Recap:Money is a medium of exchange. store of value and as a measure of value. The amount of money has something to do with the prices of goods. Inflation is a sustained increase in the average price level of all goods and services produced in the economy.

In inflation, we look at prices level of the entire basket of goods that are in the measure. What causes inflation? Inflation is caused when the money supplied in the economy grows at the faster rate than the economy’s ability to produce goods and services.

The equation of exchange is M (money supplied) V (velocity of money) = P (price) Q (quantity). The money supplied is important because the money grows at a faster rate than the economy’s ability to produce goods and services, inflation will result and also when the money supply that does not grow fast enough, production decreases, meaning an increase in unemployment.

Recap:Most people think of inflation as increased prices of milk, cheese or eggs when you go to the grocery store and that what it is but economist like to think about inflation as a decrease of purchasing power of dollars. What is the big question of economics is – what causes inflation, why do we have inflation, why do prices go up every year the way they seem to.

The answer lies in who creates this piece of the paper. The Federal Reserve creates this piece of paper. In most countries around the world, the government’s control their central banks. If they create a lot of this piece the paper, prices go up. On the other hand, if the federal reserve doesn’t create as many the piece of paper, prices may stay stable or they may even fall. Many people think inflation is always bad and it might be.

If your income doesn’t go up and prices do you’re not be able to buy the same amount to stuff at the store. The good news is for most people, most of the time their incomes go up over time so their incomes go up, prices go up but they can buy pretty much the same now as they always been able to buy the past. So let’s think about what happens if your income doesn’t go up, you’re going to have problems when prices go up. Another problem that we have with inflation is long-term contracts in the economy that deals with certain terms as security but inflation will messes up this terms.

When inflation gets too high, what we find is the country will suffer. Those long-term contracts we talked about, they get too hard for people to make and that way it affects the wealth of a nation. Economic progress requires people have security and their contract with each other. When they don’t make those kinds of long-term deals, we lose jobs and we lose economic growth.

The final video as below is a ‘must-watch’ despite being lengthy as Milton Friedman explains the economic apparatus within an economy and how a government’s role and decision affect the lives of the citizens through the manipulation of money that leads to inflation. He draws out how taxation has a direct link to inflation, productivity and unemployment. He also touches on the role of the citizens in contributing to inflation, how the citizens of an economy benefitted from an inflation, the unhealthy consumer spending habits, the struggle and the will power of a government and its citizenry in overcoming the inflation.

Recap:Inflation is a disease. It’s a dangerous disease for a society. It is sometimes a fatal disease for a society that if allowed to rage unchecked, it can destroy a society. If you say inflation is always caused by a more rapid increase in the quantity of money than an output, you’re only at the beginning of the problem because you must distinguish the immediate cause from the all the element cause, you must ask why is it that the quantity of money increases too rapidly.

Today you have inflation because government creates a very large quantity of money. The question is why do governments do that? There are fundamentally three reasons in my opinion on why we have experienced inflation and why it is a threat – the first and by far the most important is in order to pay for government spending.

….inflation is from this point of view is a form of taxation. If government spends more than it takes in, in the form of things that are called taxes. It has to make the difference, either by printing money or by borrowing from the public at large. Inflation is a tax which is imposed without representation and which nobody has to vote for and of course it’s a marvelous tax from the point of view of congressmen trying to meet the demands of his constituents for more spending. Inflation is a marvelous resource for a government…….

Year in, year out we are seeing the crucial role of the government in the economy and to witness the decisions made had affected our livelihood. Therefore as consumers, we need to do our homework in making sense of our economy. We need to ‘know our money, purchasing power, inflation and how it affects the food on our table’ in order to determine if we have been taken for a ride. Looking at the complexity of the matter, we can’t deny the fact that it’s going to be an arduously complex journey.

More: Malaysians’ Purchasing Power and the Impeding Problem of Poverty – Food Issue

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7 Responses to “Knowing Your Money, Purchasing Power, Inflation and How it Affects the Food on your Table – Food Issue”

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