Do Macroeconomic Variables Influence Inflation? Analysis from Malaysia

Abstract

Background: This paper investigates the influence of some key macroeconomic variables on the inflation
rate in Malaysia using annual time-series data for the period of 1982-2022.
Methodology: The relationships between inflation and four major indicators-unemployment rate,
economic growth, net imports, and interest rate-are investigated in this paper using the multiple linear
regression technique based on the OLS method.
Finding: The findings indicate that inflation in Malaysia has been significantly affected by fluctuations in
those macroeconomic factors. From the estimates, economic growth, unemployment rate, and interest
rate show a positive and significant effect on inflation, implying that high output, employment, and cost of
borrowing are positively associated with escalating price levels. On the other hand, net imports have a
negative and significant effect, which implies that greater trade openness and an inflow of imported goods
may dampen upward pressure on domestic prices.
Originality: Generally, the results provide useful insights into the dynamics of Malaysia's inflationary
behavior and emphasize that coordinated macroeconomic policies are crucially important to achieve price
stability along with economic growth.
Keywords: Inflation rate; Macroeconomic variables; Economic growth; Interest rate; Net imports;
Malaysia.