Inflation is killing your future

 

I’ve noticed something peculiar happening over the years. When I was a teenager, I would accompany my parents to the Giant hypermarket in our neighbourhood to pick up groceries. The month’s haul – which would fill up the shopping cart – would cost my dad around RM500 or so. And every so often, he would lament about how when he was a teenager growing up in the 60s, things were so much cheaper.

But of course, as most teenagers do, I brushed off my dad’s comments and just accepted this increase in prices over the years as a natural phenomenon. In my mind, price hikes were just something that happened, like gravity or growing old – no explanations were needed.

But as I got older, and especially after I started working, I began taking this seemingly natural phenomenon much more seriously. After all, it was thinning my own wallet and I didn’t like it. I wondered why I had to pay increasingly higher prices for goods that pretty much remained the same over the years? I mean, how much can you improve sugar or spinach or milk? And yet, I was asked to cough up more and more money for it over the years.

But again, this wasn’t an urgent enough matter for me to merit a deep dive – until now, that is. The RM500 that would fill up my parents’ shopping cart 15 years ago barely fills up a quarter of mine today. Most alarmingly, this increase in prices seems to be accelerating, all while wages remain largely stagnant.

The logical first step when conducting this inquiry is to look at the data put out by Malaysia’s authoritative but decidedly conservative department of statistics (DOSM). Its rather comprehensive Consumer Price Index (CPI) report in November 2021 pointed to some troubling trends.

The CPI is a weighted average of the prices of a basket of consumer goods such as food, transportation and electricity. It’s not a perfect metric as it is susceptible to manipulation, but it is nonetheless still a useful tool to ascertain the inflation rate.

However, simply looking at the headline CPI (inflation) number is often uninformative and sometimes even misleading. Instead, looking at the change in prices of specific important goods provides a better read on the inflation rate.

For instance, headline inflation (from November 2020 to November 2021) was 3.3%. Is it ideal? No, but it is still not alarming enough to be a source of consternation for most. However, when we look at the price inflation of specific important goods, the situation is a lot more dire (and in line with what our everyday experience tells us). The table below makes this painfully clear:

Item/Good	Inflation Rate (%) Nov 2020 – Nov 2021
Chicken	16.7
Milk, cheese and eggs	4.2
Round cabbage	19.0
Cauliflower	17.0
Spinach	9.4
Electricity	34.6
Petrol (Ron 97)	58.6

Sure, many other goods not included in the table above didn’t inflate by as much but these are some of the most important goods that we Malaysians consume on a regular basis and the headline inflation rate of 3.3% doesn’t capture the much more sinister reality we live in. The useful graphic from DOSM shown below visualises this well:

Many items underwent drastic inflation, with some of the most important goods undergoing the most inflation (chicken, electricity and petrol) while some less important and/or lower value goods underwent the most deflation (ginger and fabric softener).

Crucially, CPI numbers are often lower than reality as it’s in the best interest of the powers that be to convince the populace that the situation isn’t as dire as it seems, a view that is given credence by a 2020 International Monetary Fund paper by economist Marshall Reinsdorf that argues that inflation is underestimated.

So, it’s extra worrying that even official CPI numbers can and are being underestimated.

Another metric that can be used to get a read on inflation is the Producer Price Index (PPI), which is a measure of the inflation of the input costs of local producers. The higher the input costs for producers, the more they have to pass on this cost burden to consumers. Due to this, the PPI is often considered a leading indicator of CPI and hence inflation. In simple terms, higher PPI now equals higher CPI in the future.

The PPI infographic from DOSM below shows an alarming situation.

Even headline PPI is a whopping 12.6%, with mining, agriculture and manufacturing undergoing the most amount of inflation at 71.2%, 19.1% and 8.4% respectively. Remember, their price hike today is often our price hike tomorrow.

To illustrate this, the table below shows the 2021 PPI and CPI rates in China. As can be seen, once the PPI spikes, the CPI follows suit a month or two later.

So, if I were to venture an educated guess, I would say that real CPI in Malaysia is probably around 5-7% – double the official government number. I am basing this on a few things:

1. Even though the headline CPI is only 3.3%, inflation in some essential goods has far exceeded this (as shown above);
2. PPI, which is an indicator of future CPI, has skyrocketed;
3. The US has an officially reported inflation rate of 7%, the highest it’s been in 40 years. With the US dollar being the world’s reserve currency and a currency that Bank Negara holds billions of, its inflation becomes the ringgit’s inflation;
4. The ringgit (RM) is depreciating against the US dollar. US$1 was worth RM3 ten years ago (2012) but now it’s worth RM4.20; and
5. More speculatively, there is some data to suggest that the US inflation rate might be double the reported number, which would put it at a whopping 15%. This figure was arrived at by using the 1980’s inflation calculation methodology, instead of the watered down one used today.

At this rate (5-7%), you will lose half of your wealth’s purchasing power in a mere 10 years if you hold it in ringgit. And even if you would rather believe official CPI numbers (3.3%), that means you will lose a quarter of your wealth’s purchasing power in 10 years.

Unsurprisingly, this grim reality has not gone unnoticed. Malaysia has many issues, but this ghastly increase in prices has been front and centre of national conversation recently, and for good reason. This situation affects everyone but as is usual, it disproportionately affects the poor and disenfranchised as they are the ones likely to be reliant on stagnant, low wages.

The past year has seen their expenses increasing, their bank accounts dwindling and their standard of living plunging. This double whammy of Covid-induced career realignment (to put it mildly) and drastic price inflation has already pushed many over the brink. The devastating recent floods have only added another stressor to a system and society still reeling from Covid-19 and inflation’s one-two punch.

But why is this happening? Why are prices going through the roof?

Malaysia’s ministry of domestic trade and consumer affairs has an explanation for this, as shown in the infographic it tweeted recently:

The factors it cites for inflation are:

1. Price manipulation by middlemen;
2. Increase in the cost of logistics and transportation;
3. The ringgit’s depreciation compared with major currencies;
4. Rise in oil prices, especially petroleum;
5. Rise in import prices, especially food;
6. Activity of cartels and monopolies;
7. Greed of businesses and their focus on profits;
8. Rise in production costs; and
9. Imbalance between demand and supply.

Sure, these reasons are valid and are partially to blame for the inflation we’re seeing. However, oddly enough, there is one reason the ministry failed to include – the one reason that underlies and rules them all.

Money printing. Lots and lots of it.

We’ll look at it in my column tomorrow. - FMT

The writer can be contacted at kathirgugan@protonmail.com.

The views expressed are those of the writer and do not necessarily reflect those of MMKtT.