CPI not reflecting people’s real burden

by **Cals** Mon 19 Oct 2015, 18:09

CPI not reflecting people’s real burden

By Kamarul Anwar / The Edge Financial Daily | October 19, 2015 : 9:44 AM MYT

This article first appeared in The Edge Financial Daily, on October 19, 2015.

[You must be registered and logged in to see this image.]KUALA LUMPUR: They all rose in one fell swoop. Prices of imported goods, fuel and now intracity highway toll tariffs. Next month, light rail transit fares are set to go up too.

And lest we forget that Malaysians are still reeling from the effects of the goods and services tax (GST) introduced in April.

Numbers do not lie. But in the case of Malaysia’s headline inflation rate, the official statistics may not tell the whole story. Although toll rates at certain highways shoot up as much as 80%, they make up just a small fraction of the consumer price index’s (CPI) composition of basket of goods.

[You must be registered and logged in to see this image.]The weightage of transport-related expenses, from paying for toll fares to money spent on buying cars to petrol budget, is fixed at 14.9% of the CPI's basket of goods.

As independent economist Lee Heng Guie said, “The headline inflation may not show a big increase, but ask anyone in the street; [they will say] they are feeling the pressure [from price increases].”

Economists contacted by The Edge Financial Daily, including Lee, said they are revising upwards their inflation growth forecast for 2015 by only 0.2 percentage points to reflect the latest toll rate hike.

Lee said apart from the inclusion of controlled items into the CPI basket of goods, the index is also weighted to take into account the whole household’s expenditure. “That could dilute the effect [of the inflationary figures].”

[You must be registered and logged in to see this image.]Lee forecasts consumer inflation to rise to 2.4% this year, and to average between 2.5% and 2.6% in 2016, a small rise given that the figures from most months this year came from a high base due to the GST.

Between January and August this year, Malaysia’s headline inflation rate rose by 1.9% versus the same period last year, thanks to low fuel prices. This year, inflation peaked at 3.3% in July.

Last Thursday’s toll rate increase for 18 highways in the Klang Valley by 20 sen to RM3 came around the same time that [size=16]Bloomberg called Malaysia “the new Brazil” in an article, because political scandals rocking the two countries are causing investors to withdraw funds and subsequently pushing down their respective currencies.

Apart from that, Malaysia and Brazil face a mirroring problem of rising transport costs. In June 2013, people in Brazil’s metropolis São Paulo took to the streets to protest a near-7% hike in bus fares. While the decision was reversed, this year the government raised bus ticket prices by about 17%. Public furore was reignited, as public transport was a preferred mode of mobility.

According to statistics from CEIC Data, there were 4.7 million registered private cars in Kuala Lumpur and Selangor last year. The Statistics Department also revealed that a total of 7.75 million people reside in the two areas.

A back-of-the-envelope calculation showed that there are about six registered cars for every 10 individuals in Kuala Lumpur and Selangor, making automobiles the ultimate mode of transport in the two areas. Thus, it is understandable that the latest toll rate hike of between 16% and 80% will put a strain on the rakyat’s wallets.

CIMB Investment Bank Bhd ([You must be registered and logged in to see this image.] Valuation: 1.65, Fundamental: 1.05) director and chief economist for Malaysia Maslynnawati Ahmad said the recent increase in toll rates was “significant, especially on busiest toll roads”. Thus, even though toll rates account for less than 1% of the CPI basket’s weight, the hike’s impact can be quite significant.

“We estimate that the direct impact may add 0.4 percentage points to 0.7 percentage points to the CPI starting October. The second-round effects may be rather modest as the weakening domestic demand and the continuing low fuel prices would put a lid [on inflation growth],” she told The Edge Financial Daily.

“But given the low base, we expect the CPI reading would be markedly higher [year-on-year] in the first quarter of 2016 before tapering as the effects of the GST fade off,” she added.

Maslynnawati has revised upwards her 2015 CPI forecast by 20 basis points to 2.5% from 2.3%, given that the toll hike’s implementation only began in the final quarter of this year. For 2016, however, she has revised up her forecast to a range of 3.3% and 3.6% from 3% previously.

Meanwhile, Lee noted that consumption demand in Malaysia is still soft because people are still getting used to the price increase brought on by the GST.

“In that case, the latest toll hike might not give room for businesses to raise prices of goods unlike the times when the government raised fuel prices,” he said.

A few hundred ringgit could be too much for an individual to bear, as Kuala Lumpur and Selangor residents’ median salaries are RM2,095 and RM1,980, Khazanah Research Institute said. In 2013, the United Nations DevelopmentProgramme said that 86% of urban Malaysians had no savings at all, as stated in its Malaysia Human Development Report 2013.

According to the iMoney National Budget 2016 Sentiment survey, which was released last Friday, 65% of the survey respondents believe the GST had severely affected their finances, and blamed the consumption tax and the lack of proper execution for the escalating cost of living.

“Eighty per cent of respondents want the government to reduce the GST rate, while 68% want authorities to improve price regulation to deter errant businesses from rampantly increasing their prices,” said iMoney.

“The survey results speak volumes. The cost of getting by in Malaysia is steadily increasing, and has become a huge deterrent in first property ownership, especially in urban cities,” said iMoney co-founder and group chief executive officer Lee Ching Wei.
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