The inflation rate as at October 2011, based on Malaysia’s formula for Consumer Price Index (CPI), seemed to be at moderate level of 3.4%. I have scoured around for written articles on the inflation experience of Malaysians at large, and there are diverse views as to whether the CPI or official inflation rate truly reflects the actual situation. In a nutshell, after having done my due diligence as an inquisitive Malaysian, I would have this quick overview to express: How a Malaysian perceives the crunch of inflation is relative to three factors: (1) Context of purchases and expenses that he normally dispenses from his earnings. (2) Level of living or lifestyle that he prefers as his normal routine. (3) Income status.
Before I elaborate further, allow me to list out the items that constitute the base for the CPI tabulation:
- 1. Food & non-alcoholic beverages.
- 2. Alcoholic beverages & tobacco.
- 3. Clothing & footwear. 
- 4. Housing, water, electricity, gas & other fuels.
- 5. Furnishings, household equipment & routine household maintenance.
- 6. Health.
- 7. Transport.
- 8. Communication.
- 9. Recreation services & culture.
- 10. Education.
- 11. Restaurants & Hotels.
- 12. Miscellaneous goods & services.
Various sources of information all point to heavy weight given to three components:
- * Food & non-alcoholic beverages: More than 30% weight; leaned more heavily to goods consumed at home.
- * Housing, water, electricity, gas & other fuels: More than 20%. Note: Housing refers to gross rent.
- * Transport: Around 16%.
The three components cover at least two-thirds of the overall weight, which means the CPI that determines the inflation rate is heavily hinged on essentials. Relevant question for ponder: Should the weight allocation be spread out more evenly across the board rather than being skewed to essential items? If the answer is “yes”, then would the CPI become much higher than 3.4%?
Analysts who contend that the CPI is not reflective of the routine expenditures of modern day Malaysians - especially those living in cities and large towns - substantiate their views with some of the following arguments:
- 1. Many urban Malaysians hardly have home-cooked meals. Many households with both spouses working either eat out or pack food for home in working days (unlike in the past when housewives prepared all daily meals). Their food expenses would not be so much the costs of essential edibles purchased for consumption at home. As food served outside - given significantly lower weight by the CPI formula than food cooked at home - includes other elements added to the charges passed to consumers, it is needless to say that the costs are comparatively much higher.
- 2. The average cost of a bowl of noodles in Kuala Lumpur capital city and Petaling Jaya has increased from RM4.50 to RM5 over the past one year, representing inflation rate of 11%.
- 3. On the Transport category, reference is mainly on the cost of new vehicles, airline fares, gasoline prices and insurance. Related costs like hire purchase, spare parts, maintenance service and repair charges should also be given consideration as these are part and parcel of the overall costs for owning a vehicle.
- 4. Notable increases are experienced in the components of Alcoholic Beverages & Tobacco, Restaurants & Hotels, Health and Education. However, extreme low weights are assigned to them. In reality of modern urban living, these are no longer considered luxuries, but have become constituents of normal expenditures. More and more "urbanites" turn to private medical specialists and private hospitals for consultation. More average families are sending their children to private schools or private tertiary institutions. “Hanging out” after work in established entertainment outlets, restaurants, or hotels is already an in-thing in city life. Despite anti-smoking campaigns being implemented by the government, smokers are seen all over in coffee-shops, cafes, bistros, bars, and even in the streets. If these components are accorded heavier weights, I doubt the CPI would still stand at 3.4%.
I understand from research reports that our CPI covers the spending patterns of two population groups : (1) Urban consumers. (2) Urban wage earners and clerical workers. I am inclined to believe that the actual impact of rising prices on Malaysian urbanites would depend on their way of life and income status. An individual of below middle income who contents himself with basic necessities plus homely life may feel the declared CPI is realistic. On the contrary, an individual of higher income status who frequently eats out and is used to social plus entertainment activities will feel his cost of living is way above the official inflation rate. Hence, the pain of the pinch experienced by an individual is relative to the three factors mentioned earlier.
A prevalent practice of employers is to refer to the CPI as the guide for average year-end salary adjustments. Some large corporations, over years, have been setting three (3) per cent annual adjustment for executives appraised as average performers; which is applied to all employees of the same category regardless of residential area. An ordinary executive in Kuala Lumpur getting three per cent salary increment every year may face difficulty to cope with rising cost of living, while another of the same grade and with the same adjustment percentage in the same company but stationed in Taiping should be able to manage. Current rental of a simple unfurnished two-storey linked house within Kuala Lumpur is between RM1,500 to RM2,000 per month whereas the similar quality type in Taiping is rented out at less than RM500. I shall leave to you to form your own opinion whether the prevalent practices deployed by many employers are appropriate or inappropriate. I shall also leave to you to opine whether rightly and fairly so a certain cost of living allowance should be granted to employees who work in large cities like Kuala Lumpur, Petaling Jaya, Georgetown and Johor Bahru where the cost of living is obviously higher than other places.
I can foresee two possible issues that may have bearing to the near future inflation trends:
1. 1. Now, many essential items are either heavily subsidised or price-controlled by the government, for example palm cooking oil, petrol, flour, bread, rice, electricity etc. Sometime in mid-2010, Datuk Sri Idris Jala (Minister In The Prime Minister’s Department; CEO of Performance Management & Delivery Unit or Pemandu; tasked to manage the Economic Transformation Programme or ETP) stated in the news that Malaysia could go bankrupt by 2019 if subsidy “rationalisation” was not implemented in stages. So far, there are no eminent signs of rationalisation till now. Neither have I read news about any follow-up thereafter. But if ever it comes in after this point in time, would not inflation skyrocket? To me, it logically would.
2. 2. Announcements have been disseminated about the proposed Goods & Servce Tax (GST), which at the moment has been deferred in view of concerns expressed by various quarters. Subject to final affirmation of details by the government, the general interpretation of concerned parties is that 4 per cent tax would be imposed at each point in the supply chain. At the end of the chain, it may be the consumer who bears the heavy brunt of cost if the tax at each point is finally passed to him. A simple simulation that I gathered is illustrated below.
a. Example: A material which is normally supplied at RM1 by the raw material supplier would then cost RM1.04 (inclusive of 4 per cent tax) to the manufacturer.
b. The manufacturer who normally conveys out at RM2 for the finished product would then have to bill RM2. 12 (inclusive of 4 sen passed down by the supplier plus 4 per cent on 2.04) to the distributor.
c. The distributor who normally sells the finished product at RM2.50 to a consumer would then have to raise the price to RM2.72 at his retail outlet (inclusive of 12 sen passed down by the manufacturer plus 4 per cent on 2.62). The consumer would have to bear the brunt of 22 sen or 8.8 per cent increase in cost. But if a wholesaler is involved in the chain before the retail distributor, the brunt to the consumer would be heavier than 8.8 per cent.
The government has been harping on the noble target for Malaysia to attain high income nation status by year 2020. If this objective can commensurate with “high standard of living”, it would be more appealing. High income will be negated if the earner has to pay higher costs of goods and services. But if inflation can be managed well while income rises, that will result in a higher standard of living whereby consumers can avail themselves to more and better goods and service with a given income level. Hopefully, that would be the scenario come 2020.
If you feel the veracity of my points is questionable, please feel free to comment. I welcome feedback regardless whether you concur or disagree with me. Let us share our thoughts with each other.
I wish all a great year-end holiday experience.
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