There are two ways to think of inflation. Either things are more expensive or money is worth less. It doesn't matter which definition you prefer since both say the same thing. Neither view is popular, especially among government ministers, who are responsible for keeping the monster caged.

Since last August inflation has been a fact of life in Malaysia (Is There Inflation In Malaysia's Future? August 10, 2000), but it only now shows up in government statistics. The latest CPI report indicates that prices are up 0.6%. On an annualised basis that is around 4%, if following months show a similar increase.

The government will certainly argue that this is a one time event, what physicists call a "singularity". They will argue that it is only an aberration that can be safely ignored. It is more likely the first in a trend of increasing prices. If the trend continues at the same rate it portends an inflation rate over 8%.

The tolls were increased to satisfy the demands of the contractors. The petrol prices were increased in order to endow a fund for the poor. Bus fares were increased to support the transit system. Car prices are up. Water rates and electricity are under review.

Basic goods and services are more expensive. This is inflation. It cannot be denied, though all the ministers stand in a line and swear an oath that it isn't true. The monster is now among us, and it is possible to look at both its birth and how it affects our lives.

Basically the government has overspent. In a rush to achieve an illusory first world status, the party in power has issued contracts for highways and buildings at highly inflated prices. Costs were not kept to a minimum.

Large projects were built for which there was only temporary or marginal need. Many are under utilised and expensive to maintain. Projects were built oversize in anticipation of future requirements, justified as an instance of foresight, anticipating future demand, but with no consideration for present cost.

Malaysia has thrown money to the winds, living high on credit, and now the credit remains to haunt. The necessity to raise prices in order to service this debt has contributed to inflationary pressure. The recent lull in the boom time has shown the danger of excessive expansion.

When demand for goods retracts, prices are increased to compensate for loss of volume, in the effort to retain profitability. But the increase in prices further depresses demand, and the effect tends to be cyclical, feeding on itself.

When the price of basic goods is increased, there is less money available for discretionary spending. Retail sales contract, and the sale of luxury goods suffers. These are fundamental economic facts, and they cannot be denied. The ringgit has been pegged to the US dollar, removing the risks of foreign exchange with that country.

But the latest figures from the US show a 1.6% monthly increase in prices, which is over 20% on an annualised basis. This has serious implications for Malaysia and other Asian countries with currency pegs to the dollar.

Inflation is a monster, and once it appears, every effort must be made to restrain it. Inflation is the bane of capitalism, and has never been mastered. Many countries, especially in South America, have suffered inflation in excess of 50% over a period of years, and it is unpleasant to recount its effects.

Interest rates must go up, because lenders typically maintain a 3% spread over the real inflation rate. The cost of borrowing money goes up, reducing new capital investment. More importantly, those with large debt are more burdened to make re-payment. Profits are reduced by higher debt service costs. Bankruptcies increase because many are unable to meet the higher interest demands and are forced into bankruptcy by creditors empowered by default.

As unemployment increases, political discontent and resentment grow. Inequities become more apparent. Requests for redress of economic wrongs are more strident. The seeds of change are sown.

Retailers often remark that the rich always have money. This is true, as those with large savings can consume at a high level indefinitely. The poor and middle class, however, must make do as they can. They must reduce descretionary spending when basic costs increase. For poor families, who have no discretionary funds, the level of their basic needs must be reduced, and this often places them below the poverty level. Pensioners on a fixed income are pinched. The poor are hardest hit by inflation.

Ministers who live in sumptuous mansions, with large cash reserves and enormous assets overseas are insensitive. They respond by hiring more police and military. They increase the number of water cannons and other vehicles designed for riot control.

Inflation adds fuel to existing discontent, and thus gives a spur to needed reform. As usual, costs are high. There are risks. All change has its degree of discomfort.

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