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 reflect the economic reality.
Most urbanites will tell you that food prices have definitely risen significantly in the past year, but the latest official data indicates inflation was “at a 16-month low” in July, just rising at 1.1 per cent year-on-year.
For all of 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 2015.
So is there a gap between real consumer experience and official data? The explanation itself is both a yes and a no. 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 reveals how the entire economy is doing, providing key clues for decision-makers to adjust policies that would in turn affect Malaysians. 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 its money, 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, means there is a jump of 20 per cent. But that’s not how the CPI works.
Any fluctuation in the prices of goods in the basket, like the previous reference of the RM1 increase in the price of chicken, 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.
Mr Nurhisham Hussein, the head of the Economics and Capital Markets Department of the Employees Provident Fund (EPF), said the misunderstanding comes from our conflating of the term inflation and the cost of living.
