INFLATION, like getting old, is normal, The question is how high an inflation rate is appropriate. The value of money saved today is worth less tomorrow, reducing purchasing power and even interfering with retirement plans.

If a household’s nominal income does not increase as much, it is worse off, i.e. purchasing power or real (inflation-adjusted) income falls.

Real income is a proxy for the standard of living. After the pandemic, inflation surfaced because of the government’s response, global supply chain disruptions and the sudden increases in demand as lockdowns faded. Stimulus programmes and EPF withdrawals acted as catalysts.

Greedy corporates may deliberately withhold supplies, forcing prices to rise.

Spending on large infrastructure projects such as MRT will also increase demand for goods and services, leading to price increases.

The most popular measurement is the Consumer Price Index (CPI).

News reports say headline inflation is projected to average between 2.2% and 3.2% this year and inflation could have reached around 11% without subsidies for essential goods.

The Statistics Department showed CPI increased 3.4% in June from a year earlier, driven by a 6.1% rise in food prices.

Hopefully, the numbers have not been tweaked to understate price increases.

For 2021, the inflation rate was 2.5% (Singapore - 2.3%). From 1960 to 2021, the average inflation rate was 3.0% per year (Singapore - 2.5%).

Overall, the price increase was 478% (Singapore - 325%).

Public scepticism of the CPI has increased as cost of living is more expensive. The two are different and public perceptions of inflation are subject to biases.

CPI is computed on a single basket of goods and services which reflect average consumption patterns and average prices. It won’t reflect the individual cost of living. Therefore, inflation rates across income groups and states will be different from the national average.

The B40 income group experienced higher inflation rates than the M40 or T20 due to more expenditure on food, which generally experienced higher rates. The DOSM’s Household Expenditure Survey Report 2019, showed the B40 spend more on food and beverage items compared with the M40 at 18% and the T20 at 12.6%.

Furthermore, CPI only considers the annual rate of change in prices but cost of living also takes into account the income perspective.

Households feel the heat of rising cost of living when costs increase but incomes do not rise in tandem.

To quantitatively gauge the level of inflation, a First Quarter 2017 Bank Negara Malaysia article on “Inflation: Perception vs. Reality”, proposed an “Everyday Price Index (EPI)” that incorporates the frequency bias (at least once a month). 

It excludes infrequently purchased and big tickets items like clothing, household appliances, holiday expenses and rentals due to the less frequent variations in prices.

The result shows, over a five-year average (2012-2016), EPI was 2.6% against CPI of 2.2%.

An article “Thorough revision required to reflect actual inflation rate” by EMIR Research last June, suggested a separate Food Price Index (FPI).

Like the CPI, FPI will comprise several sub-index lines (analogous to the tariff lines under the World Trade Organisation) but devoid of the non-food items.

The weighted averages of the price increases for the FPI should be derived from a single national supply chain data management platform linking the suppliers of agrofood, small farmers, local agri-techpreneurs and retailers together on a network.

Eliminating the middlemen would empower small farmers to collectively bring their produce to the markets at reduced prices. This platform can become a powerful vehicle for data collection for policy decisions and also calculating inflation.

Cash assistance is not a sustainable solution to alleviate the cost-of-living concerns in the long run.

The DOSM’s Household Income Estimates and Incidence of Poverty Report (2020) revealed that around 20% or 580,000 households fell from M40 to B40 in 2020.

Official inflation numbers should reflect the true cost of living.

Only then can they make decisions on consumption and investment which in turn would affect the economy. Example, expecting high inflation, households and the civil service will demand higher wages beyond their productivity growth, causing a spiralling effect. Alternatively, households would cut down consumption markedly and lead to a slowdown in overall economic activity.

It is imperative to revisit our CPI and ensure that it’s more reflective of reality.

I trust the senior minister of the economic cluster and decision-makers in the Finance Ministry will listen to the experts and make good policy decisions for the economic good of Malaysia. 

What say you… – August 14, 2022.

Saleh Mohammed reads The Malaysian Insight.

* This is the opinion of the writer or publication and does not necessarily represent the views of The Malaysian Insight. Article may be edited for brevity and clarity.