REMEMBER the “zero inflation” campaign in the mid-1990s? It took place when the Malaysian economy witnessed consistently high levels of gross domestic product (GDP) growth, as well as declining inflation, unemployment rate and debt-to-GDP.

       It appears that Malaysia holds the low-inflation mantra close to its chest to this very day. Raising inflation is highly undesirable and even contributed to the Barisan Nasional government’s historic defeat in the 14th General Election, scapegoating the goods and services tax as the sole culprit.

       The nation is effectively divided into either zero or low inflation camps.

       This author can appreciate why the campaign was sensible then. The Malaysian economy was considered a regional darling to foreign investors due to its healthy macroeconomic performance and political stability.

       The latter is, in fact, a more important consideration because of the positive correlation between the two variables, which is also the notion that Malaysia considers true today. If low inflation leads to the people having one less thing to whine about, so be it.

       Studies show that the negative correlation between inflation and GDP growth is strong, buttressing the evil side of inflation.

       It contradicts William Phillips’ theory (where a lower unemployment rate correlates with higher inflation) because of the government’s active low inflation control. If a lower unemployment rate leads to low GDP growth, ergo, inflation is bad.

       So you might ask, why bother having higher inflation when the unemployment rate has been consistently trending around its natural unemployment rate?

       Maintaining the people’s purchasing power was one of many arguments for achieving the “zero inflation” campaign. The official narrative then was that the combination of high incomes and high prices makes no economic sense.

       However, such a statement ignores many key assumptions, more so when macroeconomics is, in fact, a moving target.

       In the Malaysian context, keeping inflation low is all about the demand side either through stifling wage growth or reducing demand for superior goods.

       It tells us nothing about the need for reforms, improvements in firms’ productivity through higher technology adoption and perhaps, more importantly, globalisation. These are integral variables to future economic growth.

       Without inflation, firms have little incentive to increase wages and workers to demand higher wages, and a fortiori the lack of collective bargaining power.

       Besides, as neighbouring countries, endowed with larger population sizes, are actively pursuing foreign direct investments and market access, the right thing for Malaysia to do is to “man up and scale up”.

       More intense globalisation means that countries could effectively “export” inflation to another country by shifting production abroad.

       Macroeconomic priorities should then be about exchange rate management and tariff cuts to achieve domestic price stability.

       Perhaps the real argument is that rising inflation would lead to higher unemployment, and subsequently, overall economic growth. However, while the inflation-unemployment trade-off may seem evident in the long run, such a relationship is weak from the short-term perspective.

       Intermittent spikes in inflation will not lead to higher short-run unemployment, as in the past decade.

       Contrary to popular belief, it should be encouraged so that the economy’s long-run aggregate supply curve takes a speedier rightward shift.

       In the past, most events of higher inflation stemmed from cost-push or supply shocks due to higher global oil prices. As a result, the government intervened through increasing low-skilled labour supply, production cost suppression model through subsidies and other administrative measures of price controls.

       As time goes by, such a phenomenon also blurs the relationship between interest rates and inflation.

       To be clear, the weak relationship was not all obvious in the past. The New Economic Model introduced various policies to improve both aggregate demand and aggregate supply, making the inflation rate more uneven than before.

       As a result, we witnessed higher incomes in all wage groups while the low-cost investments gradually left our shores, leaving room for the government to attract higher-quality investments. Malaysia had never seen wage-to-GDP growth any faster than in the past decade.

       However, following the 14th General Election, the government reverted to retail oil price caps to tame inflation. Furthermore, more subsidies and cash transfers are being rolled out to address higher unemployment due to the pandemic.

       There has been little effort to move the aggregate supply curve to the right, say, by improving firms’ productivity through higher technological adoption amid the pandemic. For the interest rates-inflation correlation to be stronger, the government must consider strategies that graduate the lockdown-related welfare aids in the short-to-middle term.

       The Automatic Fuel Pricing mechanism must make a return as well. If not, we must accept them as a permanent policy feature sans productivity improvements.

       After all, inflation is all about expectations. It is hard to see inflation moving upwards when subsidies and other administrative price control measures are entrenched. Without supply-induced inflation, it will be the same old (inflation) song on the horizon.

       Controlling inflation is akin to containing a worker’s true worth irrespective of skillset or productivity levels. If we want to continue pursuing the high-income dream, we have got to sleep with inflation.

       Firdaos Rosli is the chief economist at Malaysian Rating Corp Bhd. The views expressed here are the writer’s own.