ONLY IN MALAYSIA? THE SHOCKING GAP BETWEEN REALITY & OFFICIAL 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 quite reflect the economic reality.
Ask any urban dweller how much food prices have increased in recent years and they’ll tell you prices have definitely more than doubled.
Yet the latest official data indicates inflation was “at a 16-month low” in July, rising at a benign rate of 1.1 per cent year-on-year.
For the entire 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 that year.
Furthermore, the same Department of Statistics data suggested that food prices and transport costs have stabilised after a sharp four per cent hike in February (due to the Chinese New Year celebrations).
So is there a gap between real consumer experience and official data? The explanation itself is quite technical but in short, it’s a yes and no.
On one hand, economists worldwide have long decried the method used to measure inflation—the consumer price index (CPI) — saying it is far from reliable.
Domestically, there have been debates about whether or not the CPI model accurately depicts the reality on the ground.
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 is one of if not the most important economic indicators today. It tells how the entire economy is doing, providing key clues for decision-makers to adjust policies that would in turn affect all of us.
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 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, meant there is a jump of 20 per cent. As much as that sounds logical to us, that’s not how the CPI works.
Any fluctuations in prices of goods in the basket, like the previous reference of the RM1 increase of chicken price, 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. This is what Malaysians often overlook.
Shoppers are seen at a Tesco Extra store in Kuala Lumpur in this July 6, 2015 file photo. — Reuters pic
Conflating terms
Nurhisham Hussein, the Head of the Economics and Capital Markets Department of the Employees Provident Fund (EPF), in explaining the matter 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, 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 in April. But the point is that the CPI did capture the price changes of some of the basic goods.
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 of the latest reading).
George Schultze, founder of Schultze Asset Management LLC, an alternative investments firm founded in 1998 that manages approximately US$230 million (RM938.4 million) in assets and specialises in distressed securities, in a letter to Forbes magazine blamed the country’s flawed CPI model (which gave an artificial indicator about house pricing at the time) for the subprime housing crisis that led to the 2008 financial crunch.
But most importantly, how does the CPI and inflation rate affect the average Malaysian? For one, it helps determine wages. 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 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 pay cheque is growing”.
A woman pays for her lunch at a food court in a shopping mall in Kuala Lumpur. — Picture by Saw Siow Feng
Wage 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.
But there are views that the issue of wages 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 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,” Firdaos Rosli and 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 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 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.
“On the larger question of wage stagnation, it’s largely not true with one important caveat. Aggregate wage increases have more than kept up with overall inflation, but we have segments or industries where this hasn’t happened.
“Conversely, there are certain industries and certain income levels where wage increases have far outstripped inflation. So while on average Malaysian wages have increased after adjusting for inflation, some Malaysians have seen no wage increases at all,” he said.
Criticism against Putrajaya’s CPI model has also come from those within the government. For example in 2010, then Human Resources Minister Datuk Seri Fong Chan Onn said the index failed to reflect rising living costs, going as far as claiming the CPI as being “skewed and suppressed.”
One of the major problems 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 drinks prices that follow the rise in petrol prices—the movement in such prices will not be reflected in the CPI and inflation rate.
And economists, though their views about the reliability of the CPI as a measure for inflation differ, agree that the index could be improved further.
Nurhisham said one of the ways is to introduce an individual index to measure price movements in the city so that the necessary policy adjustments can be done according to the needs of city dwellers.
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 rich spend would mask the pressure faced by the lower-earning group.
– Malay Mail
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from Malaysia Chronicle http://ift.tt/2bMTFql
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