LIKE getting old, inflation is normal – but the issue is the rate of inflation. The rate affects the value of money you save today, which could be less tomorrow, its purchasing power could be reduced and this could interfere with retirement plans.
Households feel the heat when the cost of living rises but incomes do not rise in tandem.
As countries began transitioning from a Covid-19 pandemic situation to an endemic one, inflation surfaced because of governments’ responses, global supply chain disruptions and sudden increases in demand as lockdowns were lifted.
Stimulus programmes and withdrawals from the Employees Provident Fund acted as catalysts. Government spending on large infrastructure projects also increases demand for goods and services, leading to price increases.
According to news reports, inflation in Malaysia is projected to average between 2.2% and 3.2% this year; and we are told that the rate could have reached as high as 11% without government subsidies for essential goods.
The most popular measurement of the cost of living is the Con-sumer Price Index (CPI). The CPI is computed from a single basket of goods and services that reflect average consumption patterns and average prices.
It doesn’t reflect the individual cost of living. Therefore, inflation rates across income groups and states will be different from the national average.
Public scepticism about inflation rates has increased as cost of living seems higher. The two are different and public perceptions of inflation are subject to biases.
To quantitatively gauge the level of inflation, a first quarter 2017 Bank Negara Malaysia report on “Inflation: Perception vs Reality” proposed an “Everyday Price Index (EPI)” that incorporates frequency bias (at least once a month). It excludes infrequently purchased and big ticket items like clothing, household appliances, holiday expenses and rentals due to the less frequent variations in prices of such items. The result shows that, over a five-year average (2012-2016), EPI was 2.6% against a CPI of 2.2%.
An article entitled “Thorough revision required to reflect actual inflation rate” by the Emir Research think tank last June suggested a separate “Food Price Index (FPI)”. Like the CPI, the FPI comprises several subindex lines (analogous to the tariff lines under the World Trade Organisation) but is devoid of non-food items.
The weighted averages of price increases in the FPI should be derived from a single national supply chain data management platform linking suppliers of agrofood, small farmers, local agritechpreneurs and retailers all together in one network.
Eliminating the middlemen this way would empower small farmers to collectively bring their produce to the market at reduced prices. This platform could become a powerful vehicle for data collection for policy decisions as well as calculating actual inflation rates.
Cash assistance is not a sustainable solution to alleviate cost-of-living concerns in the long run. The Statistics Department’s “Household Income Estimates and Incidence of Poverty Report 2020” revealed that around 20% – or 580,000 – of households fell from the M40 (middle income) group to the B40 (lower income) tier in 2020.
The Malaysian Family needs to see the true picture of the cost of living not just official inflation numbers. Only then can we make decisions about consumption and investment, which in turn would affect the economy.
For example, expecting high inflation, households and the civil service could demand higher wages beyond their productivity growth, leading to a spiral effect. Alternatively, households could cut down on consumption markedly, leading to a slowdown in overall economic activity.
It is imperative to revisit the CPI and ensure that it is more reflective of reality. As philosopher and lateral thinking leader Edward de Bono pointed out, “Perception is real, even when it is not reality”.
SALEH MOHAMMED
Kuala Lumpur
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