Inflation And Oil Prices In Malaysia Economics Essay

Figure 1 reflects the oil monetary value motions from twelvemonth 1996 to 2009. It is observed that more than a decennary ago, rough oil monetary values were between $ 20 to $ 40/barrel with its ups and downs throughout the late 90s. The monetary value went up somewhat before dropping once more after the 1997 Asiatic fiscal crisis. In the beginning of the twenty-first century nevertheless, the monetary values started to mount to about duplicate that to the mean value of $ 40. Volatility is high as by 2002 the value dropped back to about $ 20 right after the September 11 Attacks before billowing up once more about instantly. It can be said that from 2003 onwards, the monetary value of petroleum oil throughout the universe began to steadily go up higher and higher over the few old ages till tardily 2006. This is chiefly due to concerns on wash uping oil-wells throughout the universe, the station US-Iraq war state of affairs, OPEC ‘s base on supplying the universe with limited supply with its ground to continue resources, increasing growing and dependence on ingestion of rough oil in the universe and more. All of these add into the weight and urgency that spiked confederacy and terror into the industry, added that market participants took advantage of the state of affairs to farther propel monetary values into the sky.

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By 2007, the bubble for the US Sub-prime loan crisis explosion and sent a daze moving ridge that affected hard currency flow in universe economic systems with a deficit of financess. A impermanent crisp bead occurred in the monetary values of rough oil. Within a period of merely a twelvemonth, speculators, participants, investors and providers all contributed a portion to the worst oil monetary value hiking in human history. The monetary value of merely an norm of $ 60 per barrel more than doubled to an incredible extremum of $ 140 or more per barrel. This has sent the universe oil monetary values scrambling to readapt its value in the market and besides impacting every other industry linked to it. Equally rapidly as it came, the monetary values of rough oil crashed back to about $ 40 per barrel in less than half a twelvemonth. The clang was timed, played and expected. However the harm has been done to the universe economies impacting overall monetary value additions and devaluation of currencies. The more dependent on rough oil a state is, the bigger the consequence it has taken. In short, it is the citizens who suffer from these two dorsum to endorse sub-prime loan and rough oil monetary value hiking crisis.

From so since, the monetary value of petroleum oil has lingered around $ 40 to $ 50 norm for awhile as economic systems embrace recovery before the monetary value of rough oil resumed its steep ascent once more. The ascent hovered around $ 80 per barrel by early 2010. Up until late, the monetary value of rough oil continues to hang around $ 75. It is safe to presume that the twenty-first century modern petroleum oil monetary values would go on to be at least this value of $ 70 and above with the really simple ground of increasing demand with decreasing supply.

Comparing the monetary values back a decennary ago and disregarding the monetary value hiking scenario, today ‘s petroleum oil monetary values in per barrel is twice every bit much what was valued back in the twelvemonth 2000. This merely goes to demo how much has changed in merely a short span of 10 old ages in this industry and provides a good index of what the hereafter of the crude oil industry holds for us. One thing is for certain, it is that the monetary value for rough oil will go on to mount at an increasing rate in the hereafter unless a replacement for our heavy trust on crude oil could be discovered in clip. Otherwise, there is merely that much we can fix ourselves and encompass the of all time increasing cost of life linked so to a great extent back to our grave dependence on the nucleus energy beginning of the modern universe.

Research aim

This research aspires to formalize the public perceptual experiences that the oil monetary value hiking does basically affect rising prices. It will analyze the consumer monetary value index ( CPI ) in Malaya that would be affected by the motion in oil monetary value by universe petroleum oil monetary value. Therefore, the aims of this research are as follows:

( a ) To find the consequence of planetary oil monetary value daze on Malaysia rising prices rate.

( B ) To formalize the theories and perceptual experiences that oil monetary value motions will impact consumer

merchandises and services, irrespective of whether fuel is straight or indirectly used as chief input

in the concern operations and value concatenation.

1.3 Significance of the research

The result from this research will help Malaysia authorities to explicate steps in clip of economic convulsion due to oil monetary value dazes which include financial and pecuniary policies. This will spur economic development and stabilising rising prices and unemployment rate. On the other manus, this research helps direction of companies in Malaysia to be sufficiently prepared for any return of oil monetary value crisis that will impact to a great extent on the state economic. The companies would necessitate to airt their concern theoretical account in readying for the economic crisis.

Chapter 2 Literature reappraisal

2.1 Introduction

Inflation influences the economic growing of a state including those developing, developed or even developing state. High rising prices tends to give negative perceptual experiences on a state as it indicates addition in consumer merchandises monetary value and unemployment rate. We believe that oil monetary value motion is the major cause of Malaysia ‘s rising prices. Besides, we are acute to detect whether existent involvement rate, existent exchange rate, and money supply would do more on rising prices compared to oil monetary value.

2.2 Oil monetary value and rising prices

Different researches on the oil monetary value fluctuations had been conducted to detect its consequence on certain state economic system public presentation. These findings contributed of import determination devising of macroeconomic variables which seek to get by with the hike of gasoline monetary value. For case, Hamilton ( 1983 ) found that there is important correlativity between oil monetary value motion and economic enlargement. This is supported by Gisser and Goodwin ( 1986 ) and besides Brown and Yucel ( 2002 ) , who identified that addition in oil monetary value, will be given to retard economic growing. In add-on, Tang et Al. ( 2009 ) in recent research, found that oil monetary value hiking negatively decrease end product and investing, while it increases rising prices and involvement rate in China. 1 % additions of oil monetary value is said to diminish the end product by 0.38 % ; 100 % additions of oil monetary value will increase 7.34 % of Producer Price Index ( PPI ) in the same month and 11.33 % in the following month ( Tang et al. 2009 ) . These findings supported our research inquiry and aim on whether oil monetary value hiking is one of the major causes of rising prices in Malaysia.

In Malaysia, Saari et Al. ( 2008 ) focused on the consequence of local crude oil monetary value on the cost production in agricultural and agro-based sectors. They found that if monetary value of crude oil additions 90 % , the cost of production for fishing, forestry and logging, and oil palm primary merchandises industries would increase by 30 % , 12 % and 7 % . In our research, we refine Saari ‘s research by discoursing several independent variables and its effects on overall cost of production.

2.3 Other independent variables and rising prices

Other independent variables besides oil monetary value may give high impact on Malaysia ‘s rising prices. Turnovsky and Wohar ( 1984 ) found that the causality between money supply and sum monetary values in US is instead impersonal from twelvemonth 1929-1979. In Malaysia itself, empirical surveies on rising prices and money supply are comparatively few. Masih and Masih ( 1998 ) discovered a unidirectional causality tallies from money supply to rising prices rate regardless of the slowdown construction. Recently, Tang ( 2004 ) re-investigated the causal relationship and found that money supply leads aggregative monetary value in Malaysia but there is no grounds demoing direct causal consequence runs from money supply to rising prices over 1970-1998. The Fisher ( 1930 ) stated that nominal involvement rate should reflect motions in the expected rate of rising prices. In his findings, there is no evident relationship between monetary value alteration and involvement rate in the short tally. Correlation coefficient of -0.459 was obtained for British informations and -0.289 for United State. This is supported by Lardic and Mirgon ( 2003 ) which positively validate Fisher consequence on G7 states for the period 1970-2001.

Chapter 3 Theoretical Model

3.1 Introduction

We are interested to look into whether addition in oil monetary value would really do rising prices and if so, how much of this rising prices is really related back to rise of oil monetary value Theoretically, an oil monetary value addition is assumed to be related to doing rising prices, most normally among daily points and activities such as transit cost, nutrient monetary value, and other short term traffics. This research survey is portion of happening out the extent of rising prices and hopefully to acquire a good appraisal of how much relationship is at that place between a 10 % rise in oil monetary value lending to rising prices.

Long term traffics should stay unaffected by short term monetary value alterations as it will necessitate longer period of clip for the rising prices of monetary value to kick in earlier its monetary value additions. One such illustration would be college and school fees. In fact, a good representation of this theory that we could utilize would be the very recent 2007-2009 oil monetary value hiking which flicker worldwide oil demand and monetary value traveling enormously high yet pommeling to incredibly low monetary value per barrel. This has someway contributed to how we came up with this thought for our research undertaking as we are acute to larn about lifting oil monetary value and its consequence on rising prices as a whole.

3.2 Variables

Two really of import figures in this research undertaking would be oil monetary value and rising prices. Oil monetary value as the independent variable is a really volatile value to find. We would be utilizing planetary value in finding how much US Dollars/barrel for oil monetary value, on occasion there might be some Numberss in Ringgit Malaysia ( RM ) for local mentions particularly the ballooning monetary value hiking for 2008 in Malaysia, but largely would be converted into US Dollars/barrel to efficaciously analyze the consequence of oil monetary value versus rising prices in a planetary graduated table.

Y ( rising prices ) = degree Fahrenheit ( oil monetary value, money supply, existent involvement rate and existent exchange rate )

Due to the nature of the universe economic system and everything has a relationship with others, there is more than one independent variable besides oil monetary value, including the entire money supply in the market, the existent exchange rate and the existent involvement rate. We will besides analyze how each of these variables interact with rising prices every bit good. Inflation would be the dependent variable in this research undertaking. Inflation is calculated from the consumer monetary value index ( CPI ) which comprises several classs ( as shown in Table 1 ) .

Table 3.1: Weights of the CPI by major classs in Malaya

Classs

Weights ( % )

Food and non-alcoholic drinks

31.4

Alcoholic drinks and baccy

1.9

Clothing and footwear

3.1

Housing, H2O and electricity

21.4

Furnishings, family equipment and everyday family care

4.3

Health

1.4

Transportation system

15.9

Communication

5.1

Diversion services and civilization

4.6

Education

1.9

Restaurants and hotels

3.0

Assorted goods and services

6.0

Entire

100.0

( Beginnings: Department of Statistics Malaysia, 2010 ) .

3.3 Model

The initial theoretical account that was proposed is the Input-Output Price Model. It is proven in past researches that this theoretical account defines the relationship between oil monetary value and rising prices good plenty. However, due to restricted resources and clip every bit good as permission to accessible private informations, there is merely three pupils could come up with. It is being suggested that we use a Regression Model towards our informations for computation intents to back up our findings in this research undertaking. And we will merely utilize past proven records of consequences from the Input-Output Model to verify theories that could come up in this research undertaking.

3.4 Expected way

It is expected that oil monetary value every bit good as the other independent variables such as money supply, exchange rate and involvement rate will hold some consequence on rising prices. An addition in oil monetary value, money supply every bit good as involvement rate is expected to positively affect rising prices. While an addition in exchange rate nevertheless is expected to negatively impact the rising prices rate.

Y ( rising prices ) = degree Fahrenheit ( oil monetary value, money supply, existent involvement rate and existent exchange rate )

( + ) ( + ) ( + ) ( + ) ( – )

Chapter 4 Data and Methodology

4.1 The information

The information obtained is time-series informations from twelvemonth 2007-2009. Monthly informations includes rough oil trade good monetary values that classified under universe oil monetary value. These informations is extracted from the Organization of the Petroleum Exporting Countries ( OPEC ) and Bloomberg. In add-on, monthly consumer monetary value index ( CPI ) is obtained from the Department of Statistics Malaysia while the informations of existent exchange rate, existent involvement rate are taken from Bank Negara Malaysia ( BNM ) Monthly Statistical Bulletin.

4.2 Research methodological analysis

Valadkhani and Mitchell ( 2002 ) applied the input-output monetary value theoretical account to measure the crude oil monetary value dazes on rising prices and family outgos in Australia. Similarly, Saari et Al. ( 2008 ) examined the impact of crude oil monetary value on costs productions by disaggregating the constituents in the costs production into three classs: fishing, forestry and logging, and oil palm primary merchandises industries. In the other manus, Hamilton ( 1983 ) used seven-variable vector car arrested developments ( VAR ) system to place the impact of oil monetary value daze on U.S economic system in twelvemonth 1948-1974. Similarly, Marcelo S. ( 2005 ) used identified vector autoregressions ( IVAR ) to analyze the interaction between interaction between exchange rate and cost production. Masih and Masih ( 1998 ) employed the Granger causality trial, modified Sims causality trial and vector error-correction modeling ( VECM ) attack to analyze the causality way between money supply and sum monetary values in the Southeast Asia economic systems For Malaysia, they found that all causality trials are systematically implied that money supply ( M1 and M2 ) Granger causes increase aggregative monetary values. Last, Mitchell-Innes H. A. ( 2006 ) used the same method ( VAR ) and vector mistake rectification theoretical account ( VECM ) to turn out that rising prices and long-run involvement rate moved in the same way.

4.2.1 Hypothesis proving

In our research, quantitative research ( arrested development theoretical account ) is applied as a method of analysis and reading of observation informations in order to detect the strength of relationships between independent variables ( money supply, existent involvement rate, existent exchange rate, and oil monetary value ) and dependent variable ( rising prices ) . This statistical method starts with the aggregation of informations which will be implied in arrested development theoretical account to verify null-hypothesis testing. Causal relationships are analysed by pull stringsing the factors to act upon the phenomena of involvement. Following is the research hypothesis:

Holmium: Oil monetary value is non one of the major causes of rising prices from twelvemonth 2007-2009

H1: Oil monetary value is one of the major causes of rising prices from twelvemonth 2007-2009

4.2.2 Arrested development analysis

In order to verify the hypothesis proving above, arrested development analysis is applied in gauging the unknown parametric quantities ?0, ?1, ?2, ?3, and ?4 in the relationship, utilizing the information on oil monetary value, money supply, existent involvement rate, existent exchange rate, and rising prices rate.

Y1 = ?0 + ?1X1 + ?2X2 + ?3X3 + ?4X4 + ?

where Y1 is the rising prices rate ; X1 is the oil monetary value ; X2 is the money supply ( M1 ) ; X3 is the existent involvement rate ; X4 is the existent exchange rate ; and ? is the variable stand foring all other factors that may hold direct influence on rising prices rate.

In add-on, coefficient of finding is implied to place the significance of independent variables ( money supply, existent involvement rate, existent exchange rate, and oil monetary value ) on dependant variable ( rising prices ) .

R?= { ( 1/N ) *? [ ( xi-x ) * ( yi-y ) ] / ( ?x*?y ) } ?

Consequences from the arrested development analysis and coefficient of finding trial shall make up one’s mind whether or non Null Hypothesis ( Ho ) will be accepted and reject Alternative Hypothesis ( H1 ) . Statistics, tabular arraies and graphs will be used to show the consequences of these methods.

Chapter 5 Research findings

Initial Analysis

Initial findings are done based on the graph analysis to place the relationship between dependant variable ( CPI ) and independent variables ( oil monetary value, money supply, existent involvement rate and existent exchange rate ) . From the graph, we analysed and identified grounds of those variables fluctuations from twelvemonth 2007-2009.

Figure 5.1: Relationship between CPI and Oil Price

From Figure 5.1, it can be observed that rising prices has a steady rate of addition over the past three old ages while oil monetary values met with a steep addition and peaked at June 2008 before crashing low at December 2008. After that, the value of oil monetary values increases steadily once more.

Much of the fluctuation in the value of oil monetary values was caused chiefly by human guess and use of the oil market where issues such as limited oil supply, ongoing war, terrorist act and the sub-prime fiscal crisis caused the monetary value hiking. Despite the high and low monetary values of oil per barrel around the universe, rising prices rate was non extremely impacted.

Figure 5.2: Relationship between CPI and Money Supply

From Figure 5.2, it can be observed as usual rising prices rate steadily increasing over the old ages without much intervention. However, money supply has been increasing as the spread between rising prices and money supply is shuting in together over the old ages. This could be chiefly caused by the recent fiscal crisis which caused authoritiess around the universe to panic and rapidly come up with plans to cut down the impact of the fiscal crisis which saw many traveling insolvent.

Plans are normally pulling up of brawny amounts of hard currency to be spent by the authorities or distributed through ways as a mean to hold people pass money to maintain the economic system of the state traveling. Billions of dollars deserving in measures and bonds are created and states such as Australia and Singapore even had its authorities give out Christmas Bonus in hard currency to promote their citizens to pass. There is besides the usual modus operandi of publishing new money each twelvemonth into the economic system. All of these and more could hold added up to the increasing rate of money supply into the economic system.

Figure 5.3: Relationship between CPI and Interest Rate

From Figure 5.3, existent rising prices rate sees a steady addition as already mentioned nevertheless involvement rates have a instead surprising form. This daze form can be observed at September 2007 when involvement rates all of a sudden spiked to about duplicate its usual rate from 3.60 % to 6.61 % in the difference of a month. There was non much consequence on rising prices rate but this could be due to clip slowdown for it to hold consequence.

Ironically, it was this same period that the sub-prime fiscal crisis truly started to roll up in a wider debatable graduated table. Much could be questioned on why did the involvement rates spiked all of a sudden. Yet in the wake of the crisis, we are seeing a steady diminution on involvement rates around the universe. This is chiefly because involvement rates are being lowered now to assist speed up retrieving economic systems by supplying cheaper entree to support. Typical, this low involvement rate attractive force was what started the bubble for this crisis in the first topographic point back in the twelvemonth 2001 right after the September 11 Attacks.

Figure 5.4: Relationship between CPI and Exchange Rate

Inflation rate is one time once more here, merely seeing a little extremum when oil monetary values jumped over everyone ‘s outlooks. There is non much to be said for rising prices rate with exchange rate as they both seem to be about a nice consecutive line on the graph. A closer expression into Figure 5.4 nevertheless Tells us that rising prices rate has been increasing steadily over the old ages while on the other manus exchange rates have seen an addition and lessening over the old ages alternatively.

Exchange rate has non seen much large motions. Reasons could be that exchange rates around the universe are excess sensitive and its value will respond consequently with all other exchange rates to happen its right value thanks to rapid arbitrageurs. Another ground could be due to economic systems around the universe promoting lower exchange rates to increase trading among states. This would assist the diminished economic systems recover better.

5.2 Empirical consequence and analysis

Table 5.1: Mean and standard divergence

Mean

Std. Deviation

Nitrogen

Consumer price index

109.733

3.4206

36

Oil Monetary value

69.75

25.368

36

Money Supply

888203.088

71807.6196

36

Real Interest Rate

3.4600

.66410

36

Real Exchange Rate

3.428771

.1332732

36

From Table 5.1, the figure of observation ( N ) represents sample size collected from twelvemonth 2007-2009 ( 12 months x 3 old ages ) . Smaller sample size tends to increase variableness of the distribution. N peers 36 which is larger than 30, therefore the difference is negligible. We assumed that the distribution is normal and stand for the population.

Table 5.2: Lopsidedness and kurtosis

Nitrogen

Sum

Mean

Lopsidedness

Kurtosis

Statistic

Statistic

Statistic

Std. Mistake

Statistic

Std. Mistake

Statistic

Std. Mistake

Consumer price index

36

3950.4

109.733

.5701

-.116

.393

-1.570

.768

Valid N ( listwise )

36

From table 5.2, the lopsidedness and kurtosis are -0.116 and -1.570. Negative lopsidedness indicates that the distribution skews to the left. Meanwhile, negative kurtosis indicates that the distribution has shorter tail. Hence, we concluded that the information is non normal distributed and asymmetrical.

Table 5.3: Variables coefficients

Model

Unstandardized Coefficients

Standardized Coefficients

T

Sig.

95.0 % Confidence Interval for B

Bacillus

Std. Mistake

Beta

Lower Boundary

Upper Bound

1

( Constant )

13.325

9.178

1.452

.000

-5.392

32.043

Oil Monetary value

.089

.013

.664

6.812

.000

.063

.116

Money Supply

3.911E-5

.000

.821

11.267

.000

.000

.000

Real Interest Rate

.445

.369

.086

1.205

.000

.308

1.197

Real Exchange Rate

-.716

.509

.612

6.263

.000

-.898

.834

a. Dependent Variable: Consumer price index

From Table 5.2, we can detect that:

Oil monetary value:

Oil monetary value has positive coefficient, bespeaking that this variable has positive relation with CPI.

When oil monetary value additions by USD1, the CPI will increase by 0.089 % in one month on norm, while other variables being changeless.

The p-value for oil monetary value is 0.00, which is smaller than the 5 % degree of significance used in the trial.

Money supply:

Money supply has positive mark of coefficient, indicates that this variable has positive relation with CPI.

If the rate of money supply additions by MYR1, the CPI will increase by 3.911E-5 % in one month on norm, while other variables being changeless.

The p-value for money supply is 0.00, which is smaller than the 5 % degree of significance used in the trial.

Real involvement rate:

Real involvement rate has positive coefficient, demoing positive relation with CPI.

When involvement rate additions by 1 % , the CPI will be given to increase by 0.445 % in one month on norm, while other variables being changeless.

The p-value for exchange rate is 0.00, which is smaller than the 5 % degree of significance used in the trial.

Real exchange rate:

Real exchange rate has negative coefficient, bespeaking that this variable has negative relation with CPI.

When exchange rate additions by 1 % , CPI will diminish by 0.716 % in one month on norm ; while other variables being changeless.

The p-value for exchange rate is 0.00, which is smaller than the 5 % degree of significance used in the trial.

All independent variables have important value ( sig. ) smaller than 0.05. This indicates that all variables represent big degree of statistical significance in the theoretical account. Therefore, equation for the theoretical account would be:

CPI = 13.325 + 0.089 Oil Price + 3.911E-5 Money Supply + 0.445 Real Interest Rate

– 0.716 Real Exchange Rate

Table 5.4: Adjusted R square

Model

Roentgen

R Square

Adjusted R Square

Std. Mistake of the Estimate

1

.951a

.904

.891

1.1281

a. Forecasters: ( Constant ) Oil Price, Money Supply, Interest Rate, Exchange Rate

From Table 5.3, adjusted R square is 0.891, bespeaking that all variables ( oil monetary value, money supply, involvement rate, exchange rate ) explain 89.1 % of the fluctuation in CPI. There is a strong positive correlativity between the independent variables and dependent variable. Hence, it is considered that the variables fit closely into the theoretical account and are more likely to foretell CPI ‘s motion.

Coefficient of Variation ( CoV ) is calculated to measure theoretical account ‘s goodness of tantrum. From Table5.3, the standard mistake of the estimation is 1.1281. From Table 5.1, the average CPI is 109.733. The computation of CoV is as follow:

Coefficient of Variation = ( SE ) / ( Mean Price ) x 100 %

= 1.1281/ 109.733 ten 100 %

= 1.028 %

The coefficient of fluctuation of 1.028 % indicates that the mean prognosis mistake is 1.028 % of mean CPI. The theoretical account is considered as good theoretical account as its CoV is lesser than 5 % .

Table 5.5: ANOVAb

Model

Sum of Squares

df

Mean Square

F

Sig.

1

Arrested development

370.069

4

92.517

72.699

.000a

Residual

39.451

31

1.273

Entire

409.520

35

a. Forecasters: ( Constant ) , Exchange Rate, Interest Rate, Money Supply, Oil Price

B. Dependent Variable: Consumer price index

Hypothesis:

Holmium: Oil monetary value is non the major cause of Malaysia rising prices from twelvemonth 2007-2009

H1: Oil monetary value is one of the major causes of Malaysia rising prices signifier twelvemonth 2007-2009

From Table 5.4, the significance value is 0.00 which is smaller than the degree of the significance ( 0.05 ) . Therefore, the void hypothesis ( Ho ) will be rejected. Oil monetary value is considered as the major cause of Malaysia rising prices from twelvemonth 2007-2009.

Table 5.6: Correlation between CPI, oil monetary value, money supply, involvement rate, and exchange

rate.

Consumer price index

Oil Monetary value

Money Supply

Interest Rate

Exchange Rate

Pearson Correlation

Consumer price index

1.000

.145

.857

.400

-.226

Oil Monetary value

.145

1.000

-.052

.188

-.803

Money Supply

.857

-.052

1.000

-.601

.200

Interest Rate

.400

.188

-.601

1.000

-.193

Exchange Rate

-.226

-.803

.200

-.193

1.000

Sig. ( 1-tailed )

Consumer price index

.

.199

.000

.008

.092

Oil Monetary value

.199

.

.381

.136

.000

Money Supply

.000

.381

.

.000

.122

Interest Rate

.008

.136

.000

.

.130

Exchange Rate

.092

.000

.122

.130

.

Nitrogen

Consumer price index

36

36

36

36

36

Oil Monetary value

36

36

36

36

36

Money Supply

36

36

36

36

36

Interest Rate

36

36

36

36

36

Exchange Rate

36

36

36

36

36

From table 5.5, it can be observed that:

Correlation between CPI and oil monetary value is 0.145, bespeaking positive relationship between both variables.

Correlation between CPI and money supply is 0.857, bespeaking positive relationship between both variables.

Correlation between CPI and involvement rate is 0.400, bespeaking positive relationship between both variables.

Correlation between CPI and exchange rate is -0.226, bespeaking negative relationship between both variables.

The largest Pearson Correlation coefficient is to be found between CPI and money supply, which is 0.857.

The Squared Correlation figure of 0.735 ( 0.857? ) is smaller compared to the adjusted R? of equation theoretical account, which is 0.891. Therefore, the correlativity between CPI and money supply does non demo any marks of collinearity job with the theoretical account.

Since the biggest available coefficient between braces of independent variables is non a job, therefore the equation theoretical account does non hold multi-collinearity job.

5.3 Discussion

From the consequence, it is proven that oil monetary value does act upon the rising prices fluctuations. Oil monetary value has positive relationship with CPI at 5 % degree. USD1 addition in oil monetary value tends to increase 0.089 % of CPI. Oil monetary value influences most of the cost of goods and services in the market including cost of production and transit. As a developing industrial state, Malaysia relies to a great extent on the import of rough oil as beginning of energy. Significant addition of oil monetary value tends to do hyperinflation and hence consequence the development of the state.

The consequences show that other variables such as involvement rate, money supply and exchange rate do act upon the rising prices rate as good. From the analysis, money supply has strong positive relationship with Malaysia CPI between old ages 2007-2009. Hawtrey ( 1923 ) stated that the public holds undue proportion of hard currency balances with regard to their income when money supply additions. Hence, they tend to increase the degree of disbursement. This is proven by the Quantity Theory of Money. When sum of money in economic system additions faster than the growing in the degree of future end product, this will increase the market monetary value degree and hence doing rising prices. Malaysia authorities uses assorted steps of money supply as intermediate marks to keep the stableness of rising prices.

Meanwhile, involvement rate does act upon rising prices. 1 % addition of involvement rate would be given to increase 0.445 % of rising prices rate. Malaysia as a comparatively little unfastened economic system has its interest-rate policy closely linked to the fluctuations of rising prices. This is indispensable to forestall inordinate financess inflow and outflow which could interrupt the balance of payments and state ‘s economic development. When involvement rate additions, public tends to salvage more. Money will flux to secured debt market while financess handiness in the market would be rationalised. Banks imparting rate will increase and hold cascading consequence of higher production cost- higher rising prices rate.

Last, it is shown that exchange rate has negative relationship with CPI. A depreciation of exchange rate means that the local currency is comparatively weaker compared to foreign currencies. Exported goods and services to foreign states are now comparatively cheaper. This leads to increase in exporting of local goods and services and hence contribute to higher rising prices rate in the state. From the analysis, 1 % addition in exchange rate would finally diminish the CPI by 0.716 % .

Chapter 6 Summary and decision

The universe has witnessed the impact of oil monetary value hiking which had broad coverage in the media and besides by detecting the great fluctuation of crude oil merchandises such as Diesel, gasoline and gasolene throughout the twelvemonth 2007-2009. This research is being conducted in order to detect whether oil monetary value is one of the major causes of Malaysia rising prices.

From the empirical consequences and analysis, we are confident that oil monetary value does impact the rising prices rate in Malaysia. This consequence is proven by the old research done by Tang et Al. ( 2009 ) which showed that addition in oil monetary value hiking increase the rising prices and involvement rate in China. In add-on, our findings have supported Saari et Al. ( 2008 ) research that local crude oil monetary value would increase the cost production in agricultural and agro-based sectors which could do higher rising prices rate.

Looking back into past surveies and history, addition in oil monetary value has ne’er been good to the economic system. Oil monetary value daze would spur inflationary force per unit area and stifle the economic growing. Based on the information from Malayan Department of Statistics ( 2010 ) , we found that Malaysia is an oil importer with an norm of 7.9 1000000s metric dozenss per twelvemonth. In order to control with the rising prices and ease the load on consumers and low income citizens, Malaysia authorities has been subsidising gasoline since June 2005. The monetary value of gasoline in Malaysia is reviewed from clip to clip by utilizing universe petroleum oil monetary value as the benchmark. In twelvemonth 2007, authorities spent RM8.65 billion with the petroleum oil prive averaging USD78/barrel and it reached RM18.35 billion in 2008 when the oil monetary value hit USD127/barrel. Hence, with the research conducted, it is hoped that the consequences and analysis would give a clear image on how much would the oil monetary value hiking affect the rising prices in Malaysia.

Besides oil monetary value, we have proven that other variables including money supply, existent involvement rate and existent exchange rate do do rising prices as good. More of import, we discovered that existent involvement rate and existent exchange rate enforce higher influence on rising prices compared to oil monetary value hiking. From these findings, policy-makers should take oil monetary value and those variables in consideration in covering rising prices rate efficaciously.

Chapter 7 Restriction

Up until now, the consequences of the research undertaking is outstanding to a point which we can pull decisions, readings and recommendations from it. However as with all things in life, nil is perfect in this universe. The consequences of this research might faithfully turn out a point but the advice should be taken with cautiousness as these consequences are produced with several restrictions confronting our squad.

One such restriction is the deficiency of a complete and full concern rhythm which approximately equals up to ten to twelve old ages of recorded informations. In this research itself, we are merely covering with a short term clip span of three old ages dwelling of 30 six months of records runing from January 2007 to December 2009. The ground for such a short clip span was due to the trouble in obtaining older informations from studies such as CPI, exchange rates and involvement rates. Such informations are either non made available on the cyberspace or from our local library and in order to obtain informations from the early 90s, would necessitate obtaining permission from local authorised authorities record centres which could take hebdomads to months for blessing. Covering with the limited clip we had to carry on this research undertaking, we choose to contract down our informations aggregation to a period within our appreciation. With the cyberspace spread outing quickly in the twentieth century, it was possible to obtain much more information from the cyberspace today. Therefore with the limited information set to the span of three old ages and non exemplify an full concern rhythm, the consequences might be skewed towards the occurrences of merely this three old ages and due to this it might non supply a proper and dependable representation of the behavior between the constituents of our research accurately.

Another restriction we face in this research undertaking is the deficiency of sufficient variables to stand for the full economic system theoretical account in action. Such factors losing from the consequences include but are non limited to GDP, unemployment rates and more. Reasons for these losing factors into the research theoretical account vary with each single factor. For cases, GDP was really included into the theoretical account but was subsequently taken out due to the confusing consequences it produced which do non sync good with the remainder. It was subsequently concluded that our theoretical account did non decently pattern GDP alternatively and it might be due to the restrictions set by the arrested development theoretical account itself. Unemployment rates are besides non in this theoretical account due to the trouble in obtaining a dependable beginning for this information, even more so in a monthly method. Most publishing houses merely publish these rates on a one-fourth or one-year footing. Other factors that play a function such as political stableness, societal behavior and technological promotion are highly hard to set in a province of computations that is used to find the consequences and consequence on the theoretical account. There is no proper manner to cipher political stableness, societal behavior of the community every bit good as technological promotion as these things are unmanageable and unpredictable.

The method and theoretical account that was used for this research undertaking represents another menace to the unity of the consequences for this research as by merely utilizing the arrested development theoretical account, we are restricting ourselves to a one-way computing machine generated consequence that merely calculates in a consecutive line expression. As past research done by other assorted research workers around the universe have concluded that the arrested development theoretical account while creditable for its dependability does non hold sufficient simulation that of in the existent universe economic systems to accurately expose what would hold happen and what had already happened between the constituent factors and its relationship. The arrested development theoretical account in itself was already a restricting factor on how the consequences would play out. Hence other theoretical accounts were developed by research workers to more accurately exemplary things like the existent universe economic system. Models such as VAR and the Input-Output Model was suggested and proposed. However it was agreed that there was non sufficient clip and resources for us to finish the research undertaking of that magnitude and size for the truth desired in one individual semester.

Another factor is clip slowdown which means that the informations obtained and consequences acquired do non stand for their several clip periods. This is true because a alteration in oil monetary value today do non instantly affect rising prices and trade good monetary values to alter immediately. They require a little clip spread to allow the other related variables readjust themselves. This little clip spread is known here as the clip slowdown which is the difference it would take for one alteration in a variable to hold its full consequence affect another variable wholly. Example, a individual taking medical specialty in the forenoon does n’t intend he will retrieve instantly ; it would take some clip for the medical specialty to hold its full consequence to assist the individual recover. Hence, an addition in oil monetary value today would necessitate a period of clip before its consequence can transport frontward to other industry increasing their cost of production. Due to short clip span in our research informations, our consequences might non to the full capture the full consequence of clip slowdown between the rate of rising prices and the addition in oil monetary value today.

These are merely the few chief restrictions impacting the recognition worthiness of this research consequences and therefore a word of advice is to merely take the consequences of this research undertaking as a simple guideline for future similar undertakings. The recommendations provided here are besides affected by these restrictions and we believe that there is a batch more room for betterments in the hereafter.

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