What is inflation?
Learn what inflation is, how Malaysia measures it, and how your small business can manage rising costs.
February 2024 | Published by Xero
Published Wednesday 30 September 2026
Table of contents
Key takeaways
- Inflation is the rate at which prices rise over time. As prices climb, each ringgit buys a little less.
- Malaysia measures inflation with the Consumer Price Index (CPI). The headline rate was 1.9% in August 2026.
- Rising prices can squeeze your margins and cash flow. They can also push up the cost of new or variable-rate borrowing.
- You can manage higher prices with regular habits. Review costs, watch margins, price strategically, protect cash flow and check your loans.
What is inflation?
Inflation is the rate at which the prices of goods and services rise over time. As prices rise, your money loses purchasing power, so the same amount buys less than before.
Picture your regular supplies order. If a box of packaging cost RM50 last year and costs RM52 today, that item’s price has risen 4%, and your ringgit stretches less far.
For small businesses, the challenge comes when your costs climb faster than you can adjust your own prices.
What causes inflation?
Prices usually climb when demand grows faster than supply, or when the cost of producing goods goes up. The Corporate Finance Institute (CFI) describes both pressures. Stronger consumer demand lifts prices, and so do higher input costs for goods people keep buying.
The main drivers are:
- rising demand, when customers spend faster than businesses can produce (known as demand-pull inflation)
- higher input costs, such as fuel or raw materials, which suppliers pass on in their prices
- more expensive imports, for example when a weaker ringgit raises the cost of overseas stock
- more money in circulation, which lets people spend more on the same amount of goods
For a café owner, a jump in coffee bean prices is a cost pressure. A queue out the door at every café in town is a demand pressure, and both can lead to higher menu prices.
How inflation is measured in Malaysia
Malaysia tracks price changes with the Consumer Price Index (CPI), published by the Department of Statistics Malaysia (DOSM). The CPI tracks the cost of a fixed basket of goods and services that Malaysians buy.
According to DOSM’s consumer prices dashboard, the basket covers 13 main groups and is measured against a 2010 base year. DOSM also publishes core CPI, which strips out volatile fresh food prices and prices set by the government.
The headline figure is an average, so individual prices move at different speeds. Your energy bills might rise faster than your food costs, for example.
How to calculate the inflation rate
The inflation rate is the percentage change in price between two periods. The same method works for a single product or for the CPI as a whole.
Follow these steps:
- Find the old and new price (or CPI value) for the same item
- Subtract the old price from the new price
- Divide the result by the old price
- Multiply by 100 to get a percentage
As a formula: inflation rate = ((new price − old price) ÷ old price) × 100. Say the flour your bakery buys rises from RM10.00 to RM10.50 a bag. The RM0.50 increase divided by RM10.00, multiplied by 100, shows that item’s price rose 5%.
Malaysia’s current inflation rate
Malaysia’s headline inflation rate was 1.9% in August 2026. That’s the figure in DOSM’s August 2026 CPI release, published on 18 September 2026.
Bank Negara Malaysia (BNM), the central bank, aims for a low and predictable pace of inflation. DOSM publishes new figures each month, so check the latest release when you review your prices.
Inflation vs deflation
Inflation is when prices rise over time; deflation is the reverse, when prices fall. Higher input costs push prices up, and lower input costs can pull them down.
Falling prices can look like good news for your business. Yet they also shrink the revenue you earn from each sale, while fixed costs like rent stay the same.
How inflation affects small businesses
Price rises mostly show up in your business as higher costs. They can also change how much customers spend and what it costs you to borrow.
Common effects include:
- higher supplier and energy costs that eat into your margins
- pressure to decide how much of each cost increase to pass on to customers
- softer demand for non-essential goods, as customers put essentials first
- higher interest on new or variable-rate loans
- lower real returns on the cash you keep in the bank
Lenders charge more when inflation rises because the money they get back later buys less, as CFI’s guide to interest rates explains. Your real return on savings is the interest rate minus inflation. If your account earns 2% while prices rise 3%, your cash loses about 1% of its buying power each year.
In Malaysia, BNM’s Overnight Policy Rate (OPR) influences what banks charge on loans. The OPR was 2.75% as of 3 September 2026.
Higher prices can work in your favour in some cases. If you took out a fixed-rate loan before prices rose, you repay it with money that’s worth less in real terms. The value of assets like property or inventory can rise too.
How small businesses can manage inflation
You can prepare your business for rising prices with a few regular habits. Work through these five steps to protect your margins and cash flow.
1. Review your costs
Start with where your money goes, because every ringgit you save offsets a price rise elsewhere. Compare quotes from other suppliers and renegotiate your lease or contracts. Then pause any spending that can wait.
2. Monitor your margins
Track your gross profit margin each month so you can see when rising costs start to affect profitability. Compare each product’s cost with its price to find which lines need attention first.
3. Raise prices strategically
Plan each price increase around your cost data so it reflects what you’re paying. Tell loyal customers ahead of time, and consider flexible payment terms to make the change easier to accept.
4. Manage your cash flow
Credit tends to cost more when prices climb, so a healthy cash buffer lets you cover higher bills without borrowing. Send invoices promptly and forecast your cash flow a few months ahead to spot shortfalls early.
5. Review your borrowing
Check whether your loans have fixed or variable rates, because variable-rate repayments go up when rates rise. If you need new finance, compare offers from several lenders and test how a rate change would affect your repayments.
Stay ahead of rising costs with Xero
Price increases are easier to handle when you can see their effect on your costs and cash as it happens. Xero brings your bank transactions and reports together, so you can spot rising costs early and set prices with confidence.
The sooner you prepare, the more choices you have when prices move. Start today and get one month free to plan ahead with real-time reports and cash flow forecasts.
FAQs on inflation
Here are quick answers to common questions about price rises in Malaysia.
What does inflation mean in simple terms?
It means your money buys a little less each year. At a 1.9% annual rate, something that costs RM100 today would cost about RM101.90 a year from now.
Is inflation always a bad thing?
A mild, steady rise in prices is normal in a growing economy. That’s why BNM aims for a low and predictable pace of price increases.
What’s the difference between headline and core inflation?
Headline inflation covers the full CPI basket. Core inflation leaves out fresh food and government-set prices, so it moves less when a single item like fresh produce jumps in price.
How often is Malaysia’s inflation rate published?
DOSM publishes CPI figures every month. It collects perishable prices weekly and rent data quarterly.
Does the OPR affect inflation?
Yes. BNM moves the OPR to influence borrowing costs across the economy, which shapes how much people and businesses spend and how fast prices rise.
Should I raise my prices when inflation rises?
Use your own costs as the guide, since your supplier and energy bills may rise faster or slower than the national rate. Review your margins first, then adjust the products where costs have grown the most.
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Disclaimer
This glossary is for small business owners. The definitions are written with their requirements in mind. More detailed definitions can be found in accounting textbooks or from an accounting professional. Xero does not provide accounting, tax, business or legal advice.