MALAYSIA must come up with a better method of calculating inflation as it may not be reflective of what the people are facing, economists said.

While the prices of goods have shot up of late, the inflation rate of 2.8% in May is not still reflective of the current state of the economy due to subsidies paid out by the government, they said.

Malaysia-China Chamber of Commerce vice-president Kerk Loong Sing said it is obvious that people are not feeling as though the inflation rate is a mere 2.8%, considering a drastic increase in their spending.

“The Consumer Price Index (CPI) is calculated based on a method from the 1980s. It is time to review it,” he told The Malaysian Insight.

“There were different reasons for inflation in the past, but this time around, it is more serious and is a global issue.”

The economist said due to the Covid-19 pandemic, the global supply chain has been disrupted. This, coupled with the conflict in Ukraine, has made the issue a lot bigger. 

“Russia and Ukraine are fertiliser suppliers. Russia is also one of the biggest grain exporters,” he said.

“Fertiliser shortage will naturally push food prices up as the cost of farming goes up, causing inflation worldwide.

“However, Malaysia’s inflation is still low. So we have to come up with new methods of calculating it.”

Kerk also said the government should speak to industry leaders before handing out subsidies as it will have a serious impact.

Teo Wing Leong, head at the School of Economics, University of Nottingham Malaysia, said just because the inflation rate is low, it does not mean it is wrong. 

“People may feel like there is a 30%-40% inflation, but it doesn’t mean the CPI is wrong,” he said.

“Data from Singapore, Thailand and Indonesia also showed none has reached that rate.”

Teo said CPI calculation includes prices of regulated goods, therefore there is less room for prices to go up.

“There is, however, a discrepancy between the inflation rates calculated according to international standards and the people’s perception,” he said.

“The CPI only reflects the average consumption pattern on the people, not the situation faced by individual consumers.” 

Xiao Sai Zi, an economics professor at the University of Nottingham Malaysia, said people may not be inclined to believe the CPI because they are obviously spending more.

“Inflation in May is 2.8%, but when you go out to buy things, prices have obviously shot up by 5% to 10%. This is not the price they paid last year but the CPI has remained the same. 

“If we look closer at the CPI, it looks at 200 items across various categories. The main reason driving inflation now is transport (3.9%) and food (5.2%). This means the overall inflation rate is much higher, which is reflective of the prices of goods,” Xiao said. 

Xiao also said people may think that the government is lying about the inflation rate because they do not know how it is calculated. 

Malaysia should instead use a different method, such as the personal consumption expenditure price index used in the United States.

“This index measures the prices that people living in the US, or those buying on their behalf, pay for goods and services. 

“This method is more effective and the government can take different measures to look into inflation,” said Xiao.

The inflation rate was at 2.8% in May, and it averaged 2.4% for the first five months of the year. 

In comparison with the rates of inflation in some other parts of the world, the numbers in Malaysia are low. The US reported an inflation rate of 8.6% for May; in the UK, it was 9.1%; and Indonesia’s rate spiked to 4.4% last month. – July 12, 2022.