Perceptions of inflation are largely driven by the things we consume every day, versus the things we shop less frequently.

THERE is a widely held view that prices of everyday goods and services are going up.

But is this really the case?

Consumer Price Index (CPI), the official gauge for inflation and barometer of the change in the cost of living, however, does not support this perception.

Policymakers, including from Bank Negara, are perplexed that despite the CPI rate hovering at 2.1 per cent in 2015 and 2016, the public perception is that the cost of living has risen sharply.

A friend of mine often cited the case of foodstuff. He said a kilogramme of sotong has gone up to RM30 from just around RM20 before Ramadan.

As urban folks feel the pinch of the rising cost of living and perceived slower wage rise, there is growing concern that the official CPI rate does not reflect the economic reality of price changes.

Is there a gap between actual consumer experience and government data? Economists say the answer is “yes” and “no”.

Bank Negara has suggested that the public tends to perceive inflation as being higher than the actual rate, with the bias shaped by their personal experience of paying for food and transport.

“Public perception of inflation is in fact influenced by frequently purchased price such as food. This item typically experiences higher inflation,” its governor, Datuk Muhammad Ibrahim, said.

“However, households also spend on other items, such as clothing which are in fact experiencing price decline,” he said.

Bank Negara says the so-called disconnect between the cost of living and the reported CPI rate is due to three factors.

FIRST, cost of living and inflation are two different concepts.

CPI inflation is computed based on a single basket of goods and services which reflects average consumption patterns of Malaysian households, and average prices in the economy.

To the extent there are differences in spending patterns and variations in prices at various locations, the overall CPI inflation would not reflect the individual cost of living.

Based on staff estimates, the inflation rates across income groups and states were indeed different from the national average.

• Comparing across states, households in Kuala Lumpur experienced the highest inflation rate of 2.8 per cent in 2016, which is higher than the national average of 2.1 per cent.

• Comparing across income groups, households in the bottom 20 per cent of the income group experienced inflation rates that were 0.12 to 1.12 percentage points higher than households in the top 20 per cent of the income group. This is due to their higher share of expenditure on food, which generally experienced a higher rate of inflation compared with other goods and services.

SECOND, while CPI only considers the annual rate of change in prices of goods and services, the discussions on the issue of cost of living also take into account the income perspective.

Households feel the pressure of the rising cost of living not solely when costs increase, but when incomes do not rise in tandem, leading to an erosion of purchasing power.

Bank Negara and private economists said this is not unique to Malaysia.

THIRD, the public perceptions of price increases are also subject to several natural biases. This is because consumers have different information sets than the ones used to compute the CPI when forming perceptions.

These information sets comprise initial beliefs, social interaction with other economic agents and life-time experiences. The biased perceptions could influence the consumer’s expectations of future inflation, and in turn would change consumption and investment decisions.

Public perception of inflation, according to Bank Negara, is subject to biases. There are frequency and memory biases.

• Frequency bias: Consumers’ views on inflation are predominantly driven by the price changes in items that are more frequently purchased. The frequently purchased items are non-durable items, such as food and personal care items that typically experience a higher rate of inflation.

• Memory bias: Consumers tend to remember price increases and disregard price declines.

As mentioned, the situation of the perceived gap between real inflation and official data is not unique to Malaysia. It is a global phenomenon.

As the Bank Negara chief explained, perceptions of inflation are largely driven by the things we consume every day, versus the things we shop less frequently.

Another issue is affordability given the current level of household income.

Household income has in fact inched up over the years.

The “sharing economy” — a new economic segment spawned by ride-sharing and other such businesses — has helped contribute to higher household income for Malaysians.

For example, the sharing economy has created 400,000
freelance jobs in Malaysia.

An Uber driver makes RM4,300 per month, while a Airbnb host makes an average of RM17,000 per year.

There is also a growing income opportunity for food-truck operators and e-commerce entrepreneurs.

As Prime Minister Datuk Seri Najib Razak said at the 2018 Budget consultation last week, the Malaysian economy has bottomed out in 2016 and the economy has done well despite the collapse in oil prices.

He quipped that he almost fell off his chair when told about the 5.6 per cent GDP growth in the first quarter of this year.

Najib, who is also the finance minister, however, told the industry leaders at the session that the government deserved more credit for steering the economy out of the turbulence in 2016.

Despite the upcoming general election, he said the government will remain fiscally responsible and restrain itself from over-spending.

Najib said managing rising living cost will remain a priority. As one of the lead ministries, the Domestic Trade, Cooperatives and Consumerism Ministry should show it has the mettle to deal with it.

Over to you, Datuk Seri Hamzah.

The writer feels in a digital world, the winner does not always take all

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