Cost of Living: Soaring?

The country may have seen a historical change in government in May 2018 and made some inroads on political and institutional reforms, but the high cost of living remains a legacy issue. Policymakers in neither the past nor the present government have been able to address it well.

Economists point to structural issues — income growth that is not keeping pace with rising prices, unaffordable property prices and, more importantly, a weak ringgit. Other contributors include an increase in food prices and changing lifestyles.

Weak Ringgit?

Sunway University Business School economics professor Dr Yeah Kim Leng told The Edge Malaysia in August 2019 that “the ringgit’s trade-weighted index is presently at around 12% to 13% below the 2010 level. This is reflective of the quantum of the erosion of purchasing power or the higher cost of imported goods.” Yeah estimates the share of imported commodities in private consumption at 14.1% in the 2015 input-output tables published by the Department of Statistics Malaysia, which is relatively unchanged from the 14.5% reading in 2010. “It therefore contributes a sizeable but not overly large share to the cost of living of the average household,” he adds.

Housing affordability?

The surge in property prices, especially in cities from 2011 to 2015, and the albeit slower, pace in the subsequent years. “The knock-on effects on rental rates also contributed to price levels remaining high relative to median income,” according to Prof. Yeah.

The median house price in Malaysia rose from RM158,000 in 2010 to RM280,000 in 2Q2019, an increase of 77% in nine years, according to the Malaysian House Price Index published by the National Property Information Centre.

However, not all assets have seen an increase in prices in the past 10 years or so. For instance, a Perodua Myvi 1.3 premium cost RM49,700 in 2008 but in 2019, a Perodua Myvi 1.3 Premium X was priced at RM46,590 — a decline of 6.3%. As for the Honda City, another middle-class family favourite, the price of the 1.5S model dropped to RM73,496 from RM84,980 in 2009 — down 14%. The lower car prices have been attributed to the liberalisation of the automotive sector under the New Automotive Policy 2014.

Income dilemma?

Academy of Sciences Malaysia Fellow Dr Madeline Berma says the slow growth in income and low wages have resulted in the inability of workers to cope with the rising cost of living. The minimum wage in Malaysia is set at RM1,100 nationwide while the urban median monthly salary stood at RM2,415 in 2018. Institute for Democracy and Economic Affairs director Laurence Todd says wages have been growing much faster at the top tier than at the bottom tier.

The power that income and currency strength has in influencing purchasing decisions can be illustrated by comparing the prices paid for a grande or medium-sized latte at Starbucks.

For example, the beverage costs RM13.80 in Malaysia or about 0.6% of the average monthly urban income of RM2,260, while across the Causeway, the same beverage is just S$6.60, a mere 0.15% of the average monthly salary of S$4,437 in Singapore. However, it would be more costly for someone in India or Vietnam to enjoy a Starbucks latte, which costs 1.5% of the average monthly income in Vietnam of VND6.6 million and 2.18% of the average monthly income in India of INR13,562.

Increasing food prices?

Food costs constitute 29.5% of the Consumer Price Index weightage, says Professor Datuk Dr M Nasir Shamsudin, an academician at Universiti Putra Malaysia’s Faculty of Agriculture.

“Thus, food prices tend to make the largest contribution to the overall increase in inflation and, therefore, the cost of living. This is a common phenomenon in developing economies where the proportion of income spent on food is high.” The food import bill surged from RM4.6 billion in 1990 to RM50 billion in 2018.

Disconnect with CPI basket?

The inflation rate in Malaysia, measured by the CPI, was 1% last year. Socio-Economic Research Centre executive director Lee Heng Guie says there is a disconnect between what is reflected by the CPI and the reality of the situation faced by consumers. “There is a substitution bias as consumers adjust their spending behaviour according to price fluctuations. They shift their consumption to alleviate the impact of any price increase but the CPI does not capture this as it is based on a fixed basket of goods and is only updated every five years,” he says, adding that the CPI also does not reflect quality improvement.

“The housing element is also undermined in the CPI as it only captures the rental rates but not the cost of owning a house, including the cost of servicing a home mortgage,” he points out.

Line between needs and wants blurs?

The lifestyle that Malaysians choose to lead also impacts cost-of-living issues. Those who choose to live beyond their means to keep up with the Joneses and maintain a high standard of living find themselves trapped in debt.

“The cost of living is also related to lifestyle. The quality of life has increased for Malaysians, resulting in a change in their lifestyle. Unlike the cost of living, the cost of lifestyle is the expense of keeping up a certain way of life, for example, purchasing items such as the latest mobile phone model, entertainment and holidays,” says Berma.

Many who wish to own luxury items but cannot afford to pay the full amount resort to installment schemes. And become indebted to their credit card providers. That is fine provided they can service their debt on time but there are serious implications if they are unable to do so. This happens more often with millennials. Thus, it is not surprising that more than 50% of the clients of Agensi Kaunseling dan Pengurusan Kredit (AKPK) debt management programme (DMP) are below 40 years of age. The DMP is a rehabilitative plan to assist consumers regain financial control. As at Dec 31 last year, 246,041 Malaysians had enrolled in the DMP, of which 44,925 registered just last year. Statistics from the Malaysian Department of Insolvency show that 64,632 Malaysians, ranging from 18 to 44 in age, have been declared bankrupt over the last five years.

How could we resolve?

Handouts, handouts, handouts are not a permanent solution. This is a temporary fix like in a flood or disaster.

Price control and selected places for distribution of essential items are not new. The Government has i-KEEP stores nationwide for 197 consumer items. Price discounts usually range between 2 – 20% of market price.

The key elements of costs are food, transportation and shelter. Imported food raises costs. Food imports totalled RM50 billion in 2018 compared to RM4.6 billion in 1990. Supply-side must be re-calibrated for this to work.

Transportation cost could be subsidised significantly if congestion tax or the like are introduced. More free buses on the roads and connected to rail network will help.

Rental of homes at affordable levels will ensure the B40 have a roof over their heads. More affordable homes built with tax incentives for developers will help. Land availability at reasonable prices can reduce overall costs.

A low wage economy is not helpful for a nation heading for a developed state. The minimum wage has to be RM1,500 per month. Productivity, efficiency will justify the new minimum wage. Employers have to be incentivised to commit to higher wages. Also, unleash the potential of undocumented foreign workers by registering them.

But how do we pay for this? Selective increases in taxes for the rich (above RM2.0 million incomes per annum) and corporates with “super profits” is a possiible answer. What’s the point of TNB reporting PBT of RM5.0 billion (2018) or the major banks having profits over RM4.0 billion per year? The burden has to be shared. “Trickle down” economics does not work. Government has a responsibility to wield the big stick if we are to reduce inequalities.

Reference:

1. Cost of living conundrum, 15 Aug 2019, The Edge Malaysia

2. Why cost of living remains high, 3 Aug 2019, The Edge Malaysia

3. ‘High cost of living due to weak ringgit’, 1 Dec 2019, The Star