Inflation affects everyone, but not equally. Most people feel that the cost of living is getting more expensive every year. That is true, but some items are more affected than others.
The general definition of inflation: The decline of purchasing power of your money over time. In other words, what can you buy with RM10 today will be less than what it could buy you 10 years ago? Look even further back and the difference can be surprising.
The inflation figures are calculated using a weighted average price level of a basket of selected goods and services over a set period: this is the Consumer Price Index or CPI. It is a national average — therefore, the prices in an urban area are likely to be higher than in rural areas. Also, this ‘basket of goods’ only contains primary consumer goods, not luxury or premium goods.
Top 3 contributors to Malaysian CPI weightage:
According to the Department of Statistics Malaysia, prices were taken from 17,000 retail outlets in states of Peninsular Malaysia, 2,500 outlets in Sabah and 2,300 outlets in Sarawak. This may not reflect where you live, your consumption habits, and what you choose to spend your money on. The important thing to remember here is the CPI is used to paint a picture of the current trends and at least give you an idea of what you need to prepare for in the future or to adjust your spending habits.
There are several factors that drive inflation — some are easy to manage, while others are ingrained in our society’s structure and will likely be around for a while.
1. Demand-Pull Inflation
The ‘good times’ indicator: Usually seen in times of strong economic growth, when demand surpasses supply, forcing an increase in the cost of living. It may be a sign of rising salaries, lower unemployment and a growing desire for better standards of living.
Real-life example: It’s like what happens to hotel room rates (and even certain food types for festive occasions) during peak and off-peak seasons.
2. Cost-Push Inflation
Higher costs of goods sold: Increased production cost due to rising raw material costs driven by global shocks, geopolitical unrest and trade wars. A blockage of shipping routes (like 2021’s Suez canal obstruction) can do the same. Real-life example: Due to global geopolitical issues, climate change and other factors, the prices of fertiliser, flour and grain have risen due to supply shortages.
3. Built-In Inflation
It keeps spiralling, and is hard to reverse: Even expectations that inflation will persist into the future can drive prices; workers will demand higher wages to maintain their standard of living, leading to even higher production costs, driving an upward wage-price spiral. Real-life example: While property prices rise due to construction costs (raw materials and labour), it still remains an attractive investment vehicle for many who accept higher prices as a reality that they have to live with.
Malaysia’s Food Inflation; a breakdown
Which food items are actually driving inflation in Malaysia?
Heavy rains throughout December 2021 directly impacted the supply of vegetables, fish and other seafood – the most common foods for Malaysians. External factors such as global prices of animal feed and other grains ended up driving chicken prices, while the ongoing Ukraine war is driving oil, gas, grains and fertilisers – bad news for agriculture.
So, what is the cost of living? This is when wages or income have not kept pace with inflation. Your purchasing power has declined, and you have to do two jobs just to meet the bills. This is what happened in the U.S.
Many were unhappy with the current U.S. Administration even though the inflation rate was brought down to 2%. Why? Because many face stagnant wages to costs driven up by supply chain issues after Covid. They wanted wages to go up or prices deflated so that they could enjoy a standard of living they were used to. Trump seems to have addressed their concerns.
It is good for the Madani Government to learn from the Biden Administration’s failure to address this issue (of cost of living). How? Higher cash transfers for the B40, more subsidies for essential goods, productivity improvements, strengthening the Ringgit, wage improvements and better communication on steps being taken. These are important if you want to remain in power. Not some other wasted effort like medical treatment for people from Gaza or monetary contribution to Lebanon!
Reference:
Fresh Take - How inflation impacts life in Malaysia, Hong Leong Bank