One of the most significant news that was skipped by mainstream media during the last few months is about the Inflation. Inflation for the last two months of July (7.8%) and August (8.5%) are the highest ever recorded in our country for the past 27 years (another new record for Pak Lah, and is now Najib’s baby). The full impact of fuel price increase now has come ashore – which is expected, as the lag period from date of subsidy removal to impact is about three months.

The highest increase is in transportation (which is mainly in petrol price and prices of public transport and airlines), a whopping 21.8% increase, followed by Food & Beverages, 11.7% increase. The average inflation for year to date is 4.8% (as it is an average from January till August). I expect that the final figure for the year can go as high as 6% – which means we will not only have a record high for a month or quarter, we will also have a record high for the year.

“Effective” Inflation

Now let us try to put some more senses into these figures to see what it really meant. First, let me clarify that these figures are statistical estimates produced by our Statistics Department, which I have enough confidence that they are doing an honest job (that is no smudging of data), even though I suspect that the general methodology used slightly underestimates the inflation rates (that is the actual rates can be slightly higher). Secondly, we must understand that the numbers are meant to represent “an average Malaysian person” which is a bit misleading, because to a large degree, there is quite a divergent between rural and urban cost of living. An average Malaysian person in the calculations assumes a “rural” person. Therefore, for most of you (assuming that you live in a city), I suggest that you multiply the figures produced by a factor of at least 2 times. This is probably the “effective” inflation that you are experiencing. Therefore, 8.5% x 2 = 17% inflation!

What does it mean in terms of money in purse (or out of purse)? A simple way to calculate is as follows: say that your total household income (you and spouse) is RM5,000; and you normally spends one half (50%, that is what the Statistic Department assumes anyway) or RM2500 on general items such as food & beverages, transportations, utilities, paying your general bills (such as phone bills, etc), now you will be spending a total of RM2925, an additional of RM425 per month. That is the main idea of these figures.

However, if we do a casual check on the impact of fuel price increase, we can see a different picture, as follows: If you fill in petrol six times a week for a car, you are now paying an additional RM50 per fill, so gives you a total of RM300 per month and if you have two cars the total would be RM600 per month, which already exceed the RM425 figure. What is the effect on someone whose household income total of say RM2000; the additional impact of petrol increase alone is already 15% on income (assuming he has one family car). If you add food and other bills, the total impact on him will be somewhere in the range of 25% increment! By now, you can pretty much throw the government figures of 4.8% inflation for year to date pretty much out of the window.

What does inflation do to the economy? One, it reduces income thats left for spending and savings (as you buy less for same amount, and you have less left to save): the overall impact means slow down of economic growth. It also means interest rates that you will be paying (for your mortgages and other financings – credit cards included), will increase (so far Bank Negara has not announce any increase yet). It may also weaken our currency compared to other currencies (RM has been weakening against major currencies for last few months). It also will lead to higher unemployment as well erosion of confidence, stock market prices declines and so on. All in all: the nightmares that an economy don’t want.

How and why does this happen?

It goes back to the issue of fuel subsidy, when in June the government reduce the subsidy and cause fuel prices to increase by about 40%. The intent was to save a subsidy bill of about RM35 billion from the federal budget. As I have commented in my article “Whither the Oil Prices?’, removing a subsidy of that size from our economy in a drastic manner was a very bad economic management, no matter how you explain it. As economists, we know subsidy is bad in the long term, it introduces distortions, but by changing a “price regime” overnight is worse. Subsidy of this nature should and can be removed over a long period of time, to ease off any major “shocks” to the system. Worse still, government introduces a system of “transfer” (by way of reduction in road tax etc), in order to help the “poor” – economically speaking, transfers are much worse than subsidies. It is poor economic management at highest order (and by now, if anybody who still argues that Khairy is that smart and deserve to lead UMNO Youth,  he should have his head examined).

Fuel price (or energy price) is a basic “commodity” in todays economy. It is the base price for everything. As a general rule, an increase of 1.00 in fuel will translate into between 0.30 to 0.50 into prices of goods, services and all other items. Once fuel price increase it will raise up prices of goods and services by the above ratio; and once these prices were raised, there is no way for it to come down again. Fuel price is just like a water mark, once you increase the water level, the mark will be there “permanently”. This is exactly what was happening, an increase of about 40% in fuel price (by removal of subsidy) translates into an 8.5% (officially, and the actual is more in the range of 25%, effectively) increase in broad prices. This is what we are seeing and experiencing.

Where does the Savings Goes?

Now, let us see what happen to the so called RM35 billion “savings” that the government intends benefit from: First, it has an additional RM35 billion to spend on projects ( which is only 15% of the total RM200 billion planned for RMK9 – ninth Malaysian Plan); Second, it probably can reduce the forecasted budget deficit of almost RM40 billion; Third, it can be used to pay the national debt of about RM100 billion. What actually happened? Our debts remains the same, our deficits has not been reduced, and we know that due to increase in construction costs (because of world steel, cement and manufactured items global price increase due to oil price) of almost 30% – it does not help the the RMK9 budget either. All of the “good” intentions, if any, are lost and gone.

The worse part is: in order to save RM35 billion, they end up costing the whole country a mess of the highest inflation ever in the last 27 years; and I estimates that the final tally of the “economic costs” will eventually be in the range of RM100 billion or more (using a multiplier of 3 times), and yet they have not improve on anything. Now the government is trying to reduce the fuel price (the argument is due to lowering of international oil price – which is totally absurd), in order to correct the mistakes. The problem is, fuel price, is just like a genie in a bottle: when you release it, you are done with it, no matter what you do after that; all the damage is done for good (see arguments in “Whither the Oil Prices?”). Any help in fuel price should be welcomed, but don’t expect inflation to subside any sooner.

This is only for now, what will happen in the future as the oil prices continue to be where it is (USD100 and above), and the fallout from the current explosion of the US and Global financial system (of which clouds will come our way sooner rather than later). I don’t know what will they do, and I am not sure that Najib is the most capable to handle it. My judgements on the policy makers (and their policies) thus far can be summarized with the following words: “What a bunch of goons and idiots!”

Lastly, to add insult to injury, MIER’s survey on Consumer Sentiment Index (CSI) for 2nd quarter of 2008 shows that CSI has dropped by 40% from 115 to 70 – which is the lowest ever at least within the last 10 years (after the 1997 crash).  Similarly, the Business Conditions Index also is taking a plunge. Anyhow, I am quite pleasantly surprise to read the announcement by YM Tengku Razaliegh that if becomes PM, he can improve our per capita income from USD4,000 to USD10,000 within 5 years. What a relief to hear.

Selamat Hari “inflationary” Raya!


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  1. nansa

    Dear Doc.

    very enlightening article on the inflation. For non economist, it is not difficult to understand it and can feel that our wallet are thinner faster now as compare to before the petrol price has jumped up.. However, it is interesting to know where does the purpotedly the saving actually goes?. And further, i am agreed with you that once the water mark is there it will stay even after the water has receed….even the price of petrol is dropping by another 10 cents ( well hari raya goodies..as what they say)…I dont see any effect on the other prices of daily goods showing any downward scenario…. and I don;t think so it will come ever down…
    well, pity Najib…?


    transportation cost JB-KL RM650.00 sekarang RM950.00 iaitu perbezaan RM300/trip. Satu trip boleh angkut 1000 ctns makanan. Bermakna kenaikan per ctns adalah RM300/1000 iaitu sebanyak RM0.30 per trip. Ini baru kenaikan dr manufacturer ke warehouse. bagaimana pula transport cost ke distributor dan dari distributor ke wholeseller ke kedai runcit. Pendek kata kenaikan harga minyak ni memang membebankan ke tahap gaban!!!!!

  3. a

    budget yg lepas ni adalah budget santa clause…
    ianya bermula lebih awal lagi dengan pemberian RM600 Million (RM1 Million each) to each BN constituent a few years back, to the fuel subsidies (up to 5 cars, if people can afford 5 cars do they need subsidies, heck even if they own two cars, they are well off again), development expenditures is still very lacking….

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