Discuss the impact of inflationary pressures on consumer expenditure.?

Question

since the recent increase in petrol price and electricity tariffs, inflation in Malaysia is expected to rise.' Discuss the impact of inflationary pressures on consumer expenditure.

Answer 1

Inflation fuels itself.  The spending power of money decreases as money loses it's value, in other words you can buy less than you could before for a given amount of money. Central banks tend to increase interest rates in an effort to encourage saving and discourage consumer spending.  The interest rates add to industry financing costs which are passed on to consumers in the form of higher prices.  Faced with higher prices consumers who are wage earners ask for higher wages to restore their spending power.  Higher wages further add to production costs creating even higher prices and greater wage demands.

As petrol and electricity prices are factored in to production costs they can be the trigger for the cost, price wage spiral that results.

This cycle causes an overall devaluation of the currency and this is the result of inflation.