1. Introduction

It is inevitable that world prices of commodities are increasing substantially. The increase of commodity prices does not only affect producers and consumers, but also governments. Around the world, governments face renewed pressure to reform their budgeting processes, including Malaysia. Malaysia has a well-established infrastructure and is one of the most economically advanced countries in South Asia. This essay is opted to discuss the rational of price hikes and its impacts to the cost of living particularly in the Malaysian context as well as providing the blueprint for Malaysian government in bracing the price hikes.

2.0 Do Oil Price Increases Cause Higher Other Commodity Prices?

Current commodity price hikes are not only affecting the Malaysian economy and society, but also affecting the whole world. According to OECD Economics Department Policy Notes, commodity prices have risen considerably since mid-2010. The rational of price hikes is due to the price hikes of world’s primary sources like crude oil, food, steel, wheat and such. Oil is one of the world’s basic necessities and the backbone of most countries, especially developing countries, as some developed countries do have renewable resources as alternatives in their productions of commodities. OECD Economics Department Policy Notes states that higher energy prices have contributed to rising food prices, because energy accounts for over one-third of the cost of grain production.

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2.1 Scarcity of Oil as One of the Important Natural Resources

This is further encouraged by the scarcity of natural resources and raw materials. It is expected that world supply and production of oil are falling into depletion. This problem is commonly referred to as “peak oil”, where the production of oil reaches a maximum and will subsequently begin to decline until full depletion is ultimately reached. According to Hassan (2010), it is expected that the world’s oil supply will be completely diminished by 2025.

3. Prices are Set by Both International and Local Market Factors

Commodity prices are largely determined by international market powers within regional basis at most of the time. This shows that commodity prices are in-part out of government’s control in most countries around the world including Malaysia.

3.1 Mixed Economy in Malaysia

Malaysia is practicing a mixed economic system and not exempted by international price changes. The economic activities in Malaysia are carried out by entrepreneurs in the production activities of goods and services as well as by the government that provides public goods and services to Malaysian citizens in terms of education, transportation, health and others. Based on Price Control Act 1961, Malaysian government is controlling only seven types of goods—white refined sugar, petrol, diesel, liquid petroleum gas, flour, cooking oil, and facemask (as illustrated in table 1). According to Ministry of Domestic Trade, Co-operatives and Consumerism, Malaysian government previously controlled other five goods which are steel (price control was repealed on 12 May 2008), chicken (price control was repealed on 12 May 2008), cement (price control was repealed on 5 June 2008), sweetened condensed milk (price control was repealed on 1 April 2009) and white bread (price control was repealed on 1 Jan 2010).