IN July last year, Datuk Seri Anwar Ibrahim was quoted as saying: “The Consumer Price Index (CPI) is not perfect. Current times call for changes” during Prime Minister’s Question Time in Parliament.
He was also quoted as saying the government was developing a Cost of Living Index that would include more categories in the basket of items measured, “New Cost of Living Index to offer more accurate data” (The Star, July 3, 2024).
These statements, viewed in the context of the people’s grievance of a mismatch between the official Consumer Price Index (CPI) and the actual cost of goods and services on the ground, are clear indications that the true cost of living factors are compromised due to the less than perfect basket of goods and services that currently constitutes the parameters to measure the CPI.
Inflation is a globally feared term nowadays, even in Malaysia, which is accustomed to prices remaining relatively stable.
The government, of course, has been very active in implementing price ceilings and even subsidising several “essential” goods.
This is so entrenched in Malaysia’s economy that trying to remove them or even retargeting them is akin to pulling out one’s back molars, without anaesthetic!
However, composing the Consumer Price Index (CPI) with such price-controlled, price-capped, subsidised or even “unit-limited” (meaning you can only buy a limited number of such items) impositions poses huge dangers.
The CPI is designed to measure the change in prices over a specific period.
Having such price-controlled items (a collective term we will use henceforth) in its composition means simultaneously that part of the CPI will not move, while the rest will move in bigger proportions than the overall number.
Think of it like a thermometer that’s been stuck under an ice cube while measuring a fever — part of the reading stays “cool” while the rest might be running hot, making the overall number look calmer than it is.
Now, this is opening Pandora’s Box in trying to understand what is happening.
If one goes to the Department of Statistics (DoSM) to see how it calculates the CPI, one will see a very confusing picture.
Instead of organising items being measured individually, you’ll see these 12 categories:
1. Food and non-alcoholic beverages
2. Alcoholic beverages and tobacco
3. Clothing and footwear
4. Housing, water, electricity, gas and other fuels
5. Furnishings, household equipment and routine household maintenance
6. Health
7. Transport
8. Communication
9. Recreation services and culture
10. Education
11. Restaurants and hotels
12. Miscellaneous goods and services
So, if you are wondering why the price of chilli just shot up 100 per cent, but the price increases is not being acknowledged in the CPI, then good luck finding it in the CPI components.
It might not even be there.
Another thing one has to know is the weightages of these components.
I could not find the weightages in Malaysia, although in the US (thanks to insights from the late Stanley Fischer’s approach on CPI as a reliable market signal), the top three weights go to housing (34.7 per cent), commodities (21.4 per cent) and food (13.4 per cent).
That immediately shows that the categories do not go by equal weights.
The rest of the weights are 6.9 per cent to 4.8 per cent — pretty low.
It does not take an Albert Einstein to note that if your component has a small weight, then for an individual item therein to register an impact on the whole, the movement has to be huge.
Factually, a large number of items are measured for the CPI.
The US uses something like 80,000 items.
So, a hike in chilli prices can be “invisible” unless brought to the public’s attention.
Let’s see why we said Malaysia must act against inflation even at 1.4 per cent, a laughably small number compared with the rate Europe and the US incurred in the first half of this year.
In my 2018 Fischer-inspired technical paper, Steps within a financial crisis, I noted with interest that Malaysia’s CPI increased by “only” about 5 per cent in 1998, despite the ringgit plunging nearly 50 per cent against the US dollar during the Asian financial crisis.
Thailand’s, South Korea’s and Indonesia’s CPI in 1998 were 8 per cent, 7.5 per cent and 82.4 per cent, respectively.
Remember, they, along with Malaysia, were at the epicentre of the Asian financial crisis.
In a later publication in 2015, Bank Negara Malaysia noted that Malaysia’s low inflation (specifically its Inflation Cost Pass-Through [ICPT] mechanism) was low because of the existence of price-controlled items.
So, how does this work?
Casting around among several economists, I found that they believed the percentage of price-controlled goods in Malaysia’s CPI composition to be around 20 per cent to 25 per cent.
Here’s the rub: Several items like oil have an impact far beyond their price rise — the increase would affect the prices of all items that are transported.
If oil prices are controlled, then “true” inflation is not being measured properly, yet prices of other items — imported goods, for instance — will show the oil price hikes that are not being measured in Malaysia.
These impacts have to be considered, and herein we include them as “price-controlled” items.
The low weightages of some items and categories can actually “hide” what is being incurred by the public in their daily expenditures, too.
Mathematically, if a portion is being price-controlled, then for the whole CPI to register an X per cent number, the non-price-controlled portion has to rise by the percentages shown in the table to enable the CPI to rise to that level.
As one can see from the table, the non-price-controlled portions would rise far beyond the price-controlled portion for the CPI to show a certain number.
This is probably why there is a public outcry when prices rise, even with a “low” CPI number.
Thus, Malaysia has to be ever vigilant about inflation.
Saying “Oh, why act? It’s only at 1.4 per cent” is not good enough.
Price controls, including subsidies, are not only costly but warp the actual inflation picture, skewing the economic responses that need to be or could be taken to ensure things can be brought back to normal as soon as possible.
This, of course, says nothing about the impact that incorrect CPI numbers have on real gross domestic product numbers or bond prices.
Until an independent, efficiency-driven body like DOGE takes charge, this structural flaw will keep distorting the system.
The views expressed here are those of the columnist and do not necessarily represent the views of Sarawak Tribune. The writer can be reached at med.akilis@gmail.com
