Playing with Fuel Prices can’t reverse adverse Inflation effects


Yesterday’s news (read here).  First, Shahrir says the ceiling price for petrol will remain at RM2.70 until the end of the year.  Then, Pak Lah says that the Government will announce the new fuel price on 31 August and will take effect 1 September.

Today’s news (read here and here).  Pak Lah announces the reduction of petrol price to RM2.55 and diesel price to RM2.50 with effect tomorrow, Saturday 23 August 2008.  He says:

“It is the government’s hope that the reduction in the petrol and diesel price will help ease the burden of consumers and reduce the inflationary pressure, especially on the low- and middle-income earners. The decision is also based on the current economic development,”

Also today’s news (read here).  Inflation rose from 3.8% in May to 7.7% in June to 8.5% in July.  This was caused by the fuel hike in June and the electricity hike in July.

Did the Government think that the adverse effects caused by the crazy fuel hike in June can reverse the inflation rate?

Bloomberg today says:

Crude oil may rise next week because of a weakening dollar, tension between the U.S. and Russia and falling gasoline stockpiles.

For the full report, read here.

So again what was the rationale to reduce petrol prices?

First, another flip-flop from Pak Lah.  The day before he says the new fuel price will be announced on 31 August but today he announces it, 3 days before the Pematang Pauh by-election.  Did somebody think that lowering the price now can neutralize Anwar?

Yes, there was a drop in global oil prices from US$147.27 (11 July) down to US$115 last week to US$121.18 (21 August).  But it is not stable.  Historically, oil prices have caused our domestic pump prices to stagnate or rise.  The hike in June was the highest in history at 41% when the oil price was around US$125.  Yesterday, the oil price rose to US$121.18 and the Government hurriedly announce a pump price decrease of RM0.15 today.

What will happen if next week the oil price rises to US$130?  Will there be an announcement to raise the price back to where it was before the by-election because the oil price would have gone back to the point when Pak Lah made the historical price hike?  Bloomberg’s report today indicates that the oil price will go up this week (read here).  I suggest that the Government gather all the best input and intelligence on the matter before making such hasty decisions that has grave ramifications to us all and prevent Pak Lah from being ridiculed in bad light yet again.

When the 41% price hike was announced, the Government said it was inevitable and hurriedly came out with programs to supposedly assist the poor with the RM625 subsidy.  Then the diesel fleet card for diesel subsidy.  Will these programs go away or be modified with this RM0.15 price drop?  Will the Government ask the money back from those who have claimed the rebate prior to today?

Then the other inevitable thing happened with the 41% hike.  Inflation shot through the roof.  We are only starting to see the numbers now but the effects have long been felt by the public since the day the hike took place.

Everything edible that wasn’t Government controlled pricing went up.  Salaries stagnate, disposal income shrunk drastically, the public faced the adverse crunch.

Now, what do you think reducing the petrol price by RM0.15 will have on inflation?  What went up in price will most likely stay up without any change.  What hasn’t gone up will still go up but to a lesser extent.  Inflation will likely remain high.  Retailers will never change their prices downwards as history has shown.

The high prices are here to stay.  Electricity price will not be reduced.  What in the world did the Government think this RM0.15 drop will do?  The damage is already done.  Trying to neutralize Anwar will not bring down inflation.  Anwar is not the cause of inflation.  Poor planning, lack of economic contingencies and no foresight in the petrol price increase all caused inflation to the current extent.

The Malaysian economy cannot handle a pseudo free market petrol price fluctuation at this time.  Albeit its the Government playing with the petrol price, the parties in the economy are not prepared to include such dynamics in their business pricing.  Hence, the safest way to deal with the petrol price movement now is to keep prices where they are if prices are already raised or hike the retail prices to a lesser extent.  There is no such thing as no price hike in the supply chain now.  In Malaysia, when prices go up, it never comes down.  This RM0.15 is the first in history that won’t see any drop in inflation.

The 41% petrol price hike in June gave all businesses the excuse to increase their prices.  Nobody in their right mind is going to reduce it downwards just because Pak Lah decided to play politics with petrol prices.

Please focus on the broad strategies to fight inflation and not play with petrol prices like this.  The economy will grow more uncertain with the uncertainty of petrol price announcements made by the Government.

Seems the Pematang Pauh by-election is so crucial to the BN government that this price announcement was hurriedly done without thinking through the ramifications on the broader impact to the economy and the public.  Pak Lah is only taking his first LRT ride this week after years of operation.  Good thing the trains were not “technically out of order” during his ride as is quite common nowadays.  And will the RM0.15 drop in petrol price at this time change the efficiency of public transport?

You have the answer.

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