Latest target of Malaysian ire: Inflation rate

KUALA LUMPUR — As Malaysia’s urbanites begin to feel the bite of soaring living costs, there is growing suspicion that the official inflation rate does not reflect the economic reality.

Most urbanites will tell you that food prices have definitely risen significantly in the past year, but the latest official data indicates inflation was “at a 16-month low” in July, just rising at 1.1 per cent year-on-year.

For all of 2015, the inflation rate was only 2.1 per cent despite the higher spike in prices triggered by the introduction of the Goods and Services Tax in April 2015.

So is there a gap between real consumer experience and official data? The explanation itself is both a yes and a no.

Firstly, what is the CPI and what does it do? The CPI is a way to measure the movement of prices of essential goods and services. It is calculated by taking price changes in a designated basket of items and services, and averaging them.

This, in turn, helps measure inflation, which reveals how the entire economy is doing, providing key clues for decision-makers to adjust policies that would in turn affect Malaysians. For the Malaysian CPI, 512 items are included in the CPI basket, 214 of which are food and beverage products.

They are then classified into 12 groups, the largest of which is food and non-alcoholic beverages (F&B) which collectively carry a weight of 30.3 per cent, housing (22.6 per cent), transportation (14.9 per cent), and communications (5.7 per cent).

The current CPI basket is based on how the average Malaysian household spent its money, as indicated by the 2014 Household Expenditure Survey, meaning all the items included in the basket are those considered essentials and purchased by Malaysians on a daily basis.

Now this is where it gets confusing. Since the CPI tracks the movement of prices, we assume that, say, an increase of RM1 for a kilo of a chicken worth RM5 initially, means there is a jump of 20 per cent. But that’s not how the CPI works.

Any fluctuation in the prices of goods in the basket, like the previous reference of the RM1 increase in the price of chicken, would then have to be aggregated and averaged by the price movements of all the items instead of just one. So while the chicken price may have increased, the prices of other items may not.

Mr Nurhisham Hussein, the head of the Economics and Capital Markets Department of the Employees Provident Fund (EPF), said the misunderstanding comes from our conflating of the term inflation and the cost of living.

“Most people ... think the CPI is supposed to reflect increases in the cost of living, which it actually does not. The CPI only captures the (fluctuation of) prices of goods and services we consume, but not all the prices (are) related to living expenses,” he told Malay Mail Online.

Citing the latest CPI report (July 2016) as an example, Mr Nurhisham noted that the index showed meat prices have increased 7 per cent, vegetables 6.3 per cent, and seafood 6 per cent. However, the overall index increased by just 1.6 per cent.

The biggest reason for the low overall “inflation” is that these increases are calculated together with the drop in petrol prices and the drop in price movements after the Goods and Services Tax was implemented. But the point is that the CPI did capture the price changes of some of the basic goods.

The perception that there is a serious mismatch between the official inflation rate and price increases is not unique to Malaysia.

In the United States, for example, inflation expectations consistently show that Americans think inflation is usually two to three times higher than it actually is (roughly five per cent versus two per cent as at the latest reading).

But most importantly, the CPI and inflation rate help determine the wages of average Malaysians. If inflation or prices remain low, then workers have no case to push for higher salaries.

Dr Lee Hwok Aun, Senior Lecturer, Department of Development Studies, University of Malaya, explains. “How fast the CPI is increasing, or the inflation rate, is supposed to reflect the rise in the cost of living. The inflation rate is a conventional reference point in wage bargaining between workers and employers. Wage growth should at least keep up with inflation; if wages grow slower than inflation (say, wage growth is two per cent while inflation is four per cent), then one is effectively getting poorer even if on paper the paycheque is growing”.

WAGES VS INFLATION

Malay Mail Online recently published a special report on wage stagnation. Official data for the past 20 years indicates that wage growth has failed to keep up with productivity. Some experts say wage stagnation is only one of the factors causing the living-costs squeeze. Another key reason is misguided policies derived from a CPI that fails to calculate the cost of crucial services needed to survive the city.

“It is evident that a number of critical factors affecting urban dwellers are negligible in the eyes of the CPI. Factors such as toll fares, railway costs (i.e. the LRT, and in the future, MRT) and the maintenance fees of high-rise buildings account for merely 0.1 per cent of the total CPI weight.

“These factors represent a significant share of income of an urbanite in Klang Valley,” Mr Firdaos Rosli and Ms Dwintha Maya Karthika, both economists at the Institute of Strategic International Studies, said in an opinion piece published by Malay Mail Online.

The two stated further that as long as the CPI understates the rise in the cost of living, workers are forced to take the hit even more as many companies would usually base their wages to the movement of the CPI.

But Mr Nurshisham argued that wages have grown in tandem with inflation, although not across the board. This explains why a uniformed wage data may not necessarily reflect the reality. He noted that wage increases in some segments or industries have not kept up with overall inflation, while other industries and income levels have wage increases that have far outpaced inflation.

“So while on average Malaysian wages have increased after adjusting for inflation, some Malaysians have seen no wage increases at all,” he said.

Another major problem Malaysians have with the CPI is that it only calculates the price movements of basic goods and excludes the spillover effects of price increases. An example is the increase in food and drink prices that follow the rise in petrol prices — the movement in such prices will not be reflected in the CPI and inflation rate.

Economists think that the CPI could be improved further. Mr Nurhisham suggests introducing an individual index to measure price movements in the city so the necessary policy adjustments can be made according to the needs of urbanites. Another is to adjust the weightage of the basket of goods according to income levels, because calculating the CPI by making no distinction between how the poor and the rich spend would mask the pressure faced by the lower-earning group. Malay mail online

#CASE 1: DOUBLE INCOME FAMILY WITH CHILD

Ms Nurjehan Mohamed, 37, and her husband Aref Omar, 39, together earn RM8,000 (S$2,634) a month, which puts them comfortably above Malaysia’s national median family income of RM4,585, according to data from government think-tank Khazanah Research Institute (KRI).

Yet they are struggling to save more than RM100 a month despite only having one child who has not started school.

Both Ms Nurjehan, who is a senior public relations executive and Mr Aref, a journalist, work in Kuala Lumpur, and commute daily commute from home in Serdang, about 20km away.

About RM4,000 is spent utility bills, insurance for the three of them, payments for a car loan and financing renovation work to their three-bedroom condo.

Add to that childcare expenses costing RM750, groceries and the occasional meal out at a McDonald’s, and the couple end each month with just RM110 , which sometimes is spent helping out Ms Nurjehan’s retired parents.

#CASE 2: SINGLE INCOME WITH CHILD

Sole breadwinner S Thanaraj, 31, earns RM5,800 monthly as an engineer for an American-based company in Kuala Lumpur.

When they married in 2014, the newlyweds decided to skip their honeymoon holiday in Bali as “a trip there was well above my budget,” Mr Thanaraj said.

Mr Thanaraj’s wife, K Deepa, 30, gave birth earlier this year and stopped working as a medical imager after discovering babysitters charge RM1,500 nearly as much as what she makes.

With tightly controlled spending, he can save about RM290 a month. But sometimes, he has to shell out for urgent fixes, such as to keep the family car, a 1997 Honda Accord, running. Sometimes, he digs into savings saved from year-end bonuses.

Mr Thanaraj allocates about RM100 for a movie and a restaurant meal. “My wife cooks most days and it is rare (that) we eat out and when that happens, it is a form of a form of luxury for us,” he added.

#CASE 3: DOUBLE INCOME WITH CHILDREN

With a joint monthly income of roughly RM15,000, Mr Amar Zulkifli, 28 and wife, Ms Aznah Abas, 29, can go on the occasional weekend getaway to nearby resorts outside, Kuala Lumpur or take their parents out for dinner.

But with three children aged four, three and three-months-old, they save fortheir kids’ future education fund, which sometimes doubles up as their emergency fund. “No, the amount we save is not enough,” said Mr Amar. To save more, Mr Amar, who runs a creative agency in the city, and Ms Aznah, who works as a bank executive, buy supplies online.

The couple live in a cheaper rental while they rent out the house they bought together in order to pay off the loan. They also rent out the first car they bought together for the same reason.

The KRI report is based on 2014 data, the most recent available. Since then, prices have gone up, especially with the imposition Malaysia’s Goods and Services Tax (GST) in 2015. THE MALAY MAIL ONLINE