Price Hikes Will Spark Hyperinflation

My friend wrote an opinion for today's MalayMail but we're not sure if it will be published. I thought the article was brilliant, so here it is in its entirety for your reading pleasure.

Analysis
PRICE HIKES WILL SPARK HYPERINFLATION
By U-En Ng

According to preliminary estimates, the revised fuel subsidy scheme will save the government some RM4bil annually. This involves raising the price of RON 97 petrol from RM1.92 to RM2.70 per litre and diesel by one ringgit to RM2.58 per litre (there has been no word yet on RON 95).

This is a courageous step towards the principles of trade liberalisation that underlie the all government’s latest economic initiatives, but the new increases have caught many by surprise.

Senior Ministers had been sending out mixed signals over the weekend: Prime Minister Datuk Seri Abdullah Badawi denied there would be a review of petrol prices until September, while Domestic Trade and Consumer Affairs Minister Datuk Shahrir Abd Samad sought to prepare the public for eventual parity with world market prices by August at the earliest.

Few therefore expected an immediate review--fewer still the enormous margin over the old prices (petrol by 41 per cent, diesel 63.3 per cent) that the revised scheme entailed—and, immediately after the announcement of the new rates, long queues formed at petrol stations throughout the country from Kuala Lumpur to Kuching.

Comparisons will undoubtedly be made between the estimated RM4bil savings and the RM46bil net profit Petronas posted for the financial year ending March 2007--a figure that is likely to rise even higher this year as the oil and gas corporation capitalises on high world prices.

While Malaysia is still a net oil exporter--at least until 2011-- the government will be asked why it is unable to detach a small percentage of the oil and gas producer’s profits to hold down retail prices at least until the world oil market stabilises enough to support a free-floating price model.

And if, as some analysts like George Soros predict, oil prices have been driven to stratospheric levels partly as a result of futures market speculation, this bubble will eventually burst. Surely Petronas alone yields enough more than cash to sustain a temporary defence of the current regime?

Instead, the government intends to mitigate the price rise by issuing a RM625 cash rebate to owners of any vehicle with an engine capacity at or below 2,000cc (2,500cc for trucks). The annual handout translates into RM52 a month, but this turns into a negligible sum when a full 60-litre tank will now cost RM162 to fill.

Abdullah hoped that Malaysians would not “demonstrate over this”, but the government’s attempts to assist lower-income earners via the cash payout has the true effect keeping it in the status quo, while middle- and upper-income earners will see a drastic erosion of their purchasing power.

And consumer prices were a key issue at the recent general elections that saw the Barisan Nasional lose its two-thirds majority.

If fuel alone were the problem, Malaysian consumers would likely absorb the impact with moderate grumbling. The latest measures, however, were announced together with a review of electricity tariffs that will see household rates rise by 18 per cent and businesses by 26 per cent by July.

Fuel and electricity are Malaysia’s two principle sources of energy (as is also the case with the rest of the world), and price increases at source will undoubtedly lift downstream prices beyond levels acceptable to a society already reeling from high food costs and the hyperinflationary effects of earlier increases.

The entire supply chain, from manufacturers, to distributors and retailers will now face the prospect of a “double-whammy”--paying a quarter more on their electricity bills as well as bearing the drastically higher price of fuel.

The resulting cost increases will undoubtedly be passed on to the consumer, and might in turn precipitate a crisis in domestic production as demand for some goods falls through the floor with the diminution of real income.

The effects of inflation, let alone hyperinflation, are unpredictable at best in a country that recently avoided paying a RM900 minimum monthly wage. At worst the combined effect of these latest developments will set a match to the powder keg of social discontent.