No, CPI Is Not The Ultimate Tool To Measure Inflation

Is our inflation rate REALLY among the lowest in the region?

According to the Department Of Statistics Malaysia, the inflation in June was 3.4% compared to 2.8% in May. On a monthly basis, the CPI rose only 0.6% from May to June 2022. Using these figures, the government boasted that our inflation rate is still among the lowest in the region.

However, logic dictates that the CPI (Consumer Price Index) is not an adequate measure of inflation. It is akin to looking at Google map from a few thousand feet above the ground. It tells certain things accurately of course such as distance and density, but it does not tell the terrain and other things.

If an army commander uses such information to plan an attack on his enemy in that area, they will surely face a lot of uncertainties and surprises and chances are, they will fumble.

If we look slightly deeper, we will find out that the increase in food items is 6.1% and 130 food items recorded an increase of more than 10%. Price of chicken increased by 17.2% in June compared to an increase of 13.4% in May. But we know that based on past experience, in such scenario, food on the table at restaurants and even hawker stalls will not increase by 10 to 15% but between 20 and 25%!

PTPTN Recipients Worst Hit

In dollars and cents, it means even a simple meal (probably with smaller chicken or fish) at university cafeterias or its surrounding eateries have been increasing from RM7 to RM8.50 or RM9.00. That is about RM2 per meal and assuming students need three meals a day, that will be extra RM6 a day or about RM200.00 a month.

I have spoken to a few students from a couple of universities over the weekend and they said the food prices at cafeteria and surrounding eateries have increased slowly & steadily the past few months. Responding to my enquiries, different students react differently.

Those who depend solely on PTPTN loans are the worst hit, having to cut down on their meals by taking lesser full meals, substituting with instant noodles, bread or cook on their own. Those who depend on PTPTN loans and additional support from parents means they have to ask for more pocket money now.

Those who have part time jobs or doing “small business” to earn a few hundred ringgit a month, have no problem coping with the higher cost of living.

Increase In Rent

As I mentioned in my last article, not only the business sector will be passing down the higher cost of business operation down to consumers, even consumers will pass it down to other consumers. For example, the price of room or apartment rental for students will definitely increase.

What has that got to do with a rise in food prices? Properties do not consume food, some will argue but house owners or the landlords do consume chicken and fish dont they? So when their costs of living increase, naturally they will pass it down to their tenants. In such scenario, the fixed income earner will be at the end of the chain having to absorb everything.

The government has a few resources on its own to manipulate the CPI, well, at least if they want to. The raw data used to calculate the CPI is not widely available to the public and as such make it almost impossible for the public to “audit” their findings.

Furthermore governments are known to add and change the components of the items in the “basket of goods” as well as changing the method of calculation from time to time, reason given is to arrive with more accurate results. It will be good for the public if government is more transparent and publishes the changes in price of all the items in the “CPI basket” every month. At the same time, the public at large will be able to provide beneficial real time inputs to government.

Price of CPI basket of goods may change from time to time, but gov’t needs to be transparent about the prices of all the items. – NMH graphics

Not A True Picture

Again as I mentioned in my last article, government made policies on assumption that people are rational. In this case government always make assumption that consumer spending habit change as the price of goods rise. But what if price of certain goods in the “basket of CPI goods” rise and consumer substitute the products they have been using to another product that is not in the “basket”? It will not give the true picture on the ground, right?

The fact is, different country measures inflation differently as well as having different items on its CPI basket. In fact various segments of society measure inflation differently, not to mention differing demographics.

Take university students for example. To them if one meal was RM6 then but now is RM8, it means inflation is 25%. For those who are renting houses, an increase of rental from RM1,000.00 to RM1,200.00 per month means an inflation of 20% to them. Worst still if they are fixed income earners with an average salary hike of 7% per year.

And we want to tell them that our inflation rate is the lowest in the region? Tell them to be more resourceful, that’s more practical, isnt it? But politicians wont do that because such advice will be seen as “politically incorrect”.

So how will it be in the coming months? As everyone already knows by now that the high rate of inflation especially on food items was due to supply chain disruption resulting from the war in Ukraine which begins in late February this year.

External Factors

The situation doesn’t look good the last few days since Russia is talking about another cut in oil & gas supply to Europe. Barely hours upon signing the agreement with Ukraine brokered by Turkey to free the Odessa port for the very much needed grain export to Africa, Russia bombed the port with few missiles. Hopefully it will not affect the agreement.

Our Prime Minister announced a few allocations this week such as RM124 million to 590,000 families in Kelantan and an investment of RM2.3 billion to generate 4,200 jobs. According to the Prime Minister’s speech in Kelantan last Saturday, the government has provided additional subsidies of RM 77 million to
control price on essential items.

Is it enough? Obviously not, but it is better than nothing. But subsidies are just short to medium term solution. Government has to generate more revenue to provide more subsidies from time to time. But certainly cutting the salary of cabinet ministers is just a political suggestion or gimmick that is not going to change anything.

Unlike countries in Europe that are facing serious inflation due to political decision made by their respective government to impose sanctions on Russia which is now backfired, inflation in Malaysia is not a result of a wrong decision made by the government.

While it make senses for the people of UK, Spain, Italy, France & Germany to go on the streets to protest against the decision made by their respective governments, a protest here for the same reason will not be going to change anything, economically.

As the bulk of inflation was due to a rise in food items, the long-term solution is still a better food security plan than what we have now. We will talk about that in the coming week. – New Malaysia Herald

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