Factors affecting inflation in Malaysia

Chen, Zhi Ni (2024) Factors affecting inflation in Malaysia. Final Year Project, UTAR.

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Abstract

Inflation has emerged as a significant concern globally, posing challenges for maintaining low and stable inflation rates across many nations. In Malaysia, inflation has been influenced by various economic and external factors in recent years. This research delves into the factors impacting Malaysia's inflation rate from 1992 to 2022, drawing on annual data spanning 30 years. Additionally, it explores the relationships between inflation and key factors such as money supply (MS), unemployment rate (UN), gross domestic product (GDP), and exchange rate (ER). To investigate the factors affecting in Malaysia's economy, the time series data analysis will be tested by using the OLS regression to determine the significance of independent variables in affecting inflation. The data for this study were collected from the World Bank and the Department of Statistics Malaysia. The OLS regression result shows that the money supply (MS) and exchange rate (ER) have a relationship while the gross domestic product (GDP) and unemployment (UN) have no relationship. Therefore, the CPI model shows that UN and ER have a negative impact on the CPI. However, MS and GDP have a positive impact on the CPI. Since exchange rates have the most significant impact on the CPI in this study, investors are advised to refer to exchange rates before making decisions. The exchange rate has a significant negative relationship with inflation in Malaysia. When the exchange rate rises, the inflation rate falls, and vice versa. All in all, the target of reducing inflation to 2% is critical to Malaysia’s economic competitiveness and long-term goals. This study suggests that investors can refer to exchange rates before making decisions. Upcoming studies could prioritize this research to provide better insights to policymakers and investors

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