Standfirst: Prices in general tend to move upward as development takes place; an increase of 2-3 per cent is manageable and good for the economy IF there is one issue most Malaysians are preoccupied with, it is the rising cost of living. What is it, and why does it happen? And, more importantly, how should it be addressed?
Let us first deal with what it is and its causes. Simply put, the rise in the cost of living happens when all prices increase at a faster rate than what the general public earns, such as wages.
There are two elements here; prices and wages. When this happens, it will directly impact the people as their standard of living deteriorates over time.
Economists use the concept of inflation to understand this phenomenon, using the consumer price index (CPI) — the cost of a given basket of goods and services spent by consumers.
Usually, the level of inflation is expressed annually, and for the past two years, Malaysia’s inflation rate was at 2.1 per cent. This year, it is estimated at three per cent. These numbers are considered stable and realistic as Malaysia uses headline rather than core inflation.
In other words, the inflation rate includes highly volatile items of food and energy prices in its calculation. If that is the case, why is the man in the street feeling the pinch?
Bank Negara Malaysia, in a recent report, argued that one of the reasons that causes this gap between data and ground sentiment is perception.
According to the report, it is due to two types of biases.
The first is “frequency bias”, where consumers tend to focus on prices of goods that they usually buy, such as food, compared with other goods and services.
Second is the “memory bias”, where consumers tend to be alert on price increases, but have a tendency to overlook when prices are in decline.
Regardless, unless there is a serious shock in the economy, prices, in general, tend to move upward as development takes place. But, an increase of around two or three per cent should be manageable and, in fact, good for the economy.
Of course, when prices go up exponentially (inflationary spirals) like what happened in Germany after World War 1, or hyperinflation in Zimbabwe in 2008, the economy and the people will be badly affected. But, what we are experiencing in Malaysia today is far from these extreme scenarios.
The other explanation would be on people’s earnings, such as wages. When wages are not proportionately increased in tandem with the overall prices, then one’s purchasing power would be diminished. This could be the crux of the matter, among other things, and hence, should be one of the main focus when discussing on how to solve this matter. Unfortunately, this pertinent issue is now being highly politicised by the opposition.
Recently, the opposition have come up with a nonsensical narrative, that the increase in cost of living is due to one single factor, that is, 1Malaysia Development Bhd (1MDB).
This argument is clearly unfounded and an attempt to mislead the people. And, to suggest that the Goods and Services Tax (GST) was introduced in order to pay off 1MDB’s debt, is yet another “fallacious” logic by the opposition to deceive the people.
To begin with, GST is about structural reform in the economy. Before GST, our revenue-base was oil-dependent.
This is not sustainable in the future and truth be told, when oil prices dropped recently, GST made our economy less vulnerable to external shocks.
And now, the opposition claims that they can bring prices down by abolishing GST. How outlandish!
Even in the past, the opposition argued that by bringing oil prices down, overall prices would also go down. As we all know, this proposition on the cause and effect has been proven wrong.
The fact that prices are sticky downward has been omitted in their analysis. But, more crucially, this proposal neglects the very fundamental mechanics of economics, that is, the principle of trade-off.
How do you deal with the loss of RM40 billion revenue due to the drop in oil prices if GST is abolished? The same with their other economic proposals, such as having free education and reinstating a blanket, inefficient and unjust subsidy system?
GST cannot be the sole reason for the sustained increase in prices as even before GST was introduced, the cost of living in Malaysia was already on the rise.
The point I want to make here is that the opposition must be honest about solving the plight of the people and; as I have mentioned above, to address the issue of rising living costs, the emphasis on improving the people’s income is crucial, among other things.
In 2013, the government officially launched the minimum wage policy.
And now, the government is in the process of reviewing the wage scheme upward, especially the starting salary of fresh graduates. This is an example of how this issue can be addressed.
The government has many programmes to improve people’s income, such as through the Superb, Mara, Teraju and Magic initiatives. Besides, the government has also focused on the improvement of overall productivity through specific mechanisms under the recent launch of Malaysia’s Productivity Blueprint.
True, these programmes take time to bear fruit and the burden of a high cost of living is happening now. This is where the Bantuan Rakyat 1Malaysia (BR1M) comes in. BR1M eases the people’s financial burden, especially for the B40 and M40 groups. Even if the B40 household experiences a RM1,500 increase due to the spike in living cost per year, for instance, at least they only bear the extra cost of RM300 yearly as the government has provided RM1,200 per household for BR1M.
It is also wrong for the opposition to suggest that income has stagnated; a Khazanah Research Institute (KRI) report said the overall household income has improved and the B40 group recorded faster growth compared with the M40 and T20 groups. To argue that the government has failed to provide job opportunities is also misplaced, as around 2.2 million jobs have been created since 2010.
The fact is, we are moving in the right direction and dealing with economic issues is normal because we are progressing.
Irwan Shah Zainal Abidin is the director of the Asian Research Institute of Banking and Finance (ARIBF), Universiti Utara Malaysia