By Jessica Wee

Warren Buffett on inflation ‘it is like running up an escalator going down’!

Covid has been making its rounds in our world for the last 2 years, disrupting everything we know from family gatherings to supply chains. The pandemic has cost the global economy trillions in losses globally.

On top of having to deal with deaths and hospitalizations, 75% of Malaysians who lives in urbanized areas are experiencing the highest inflation rate.

RISING INFLATION A KEY CHALLENGE

To sustain government expenditures the Malaysian government increased the statutory debt ceiling of the federal government from 60% to 65% of GDP — a necessary move in view of the hugely expansionary budget.

Despite these measures, rising inflation remains a challenge as Malaysia is heavily reliant on foreign inputs and these inputs are sensitive to the supply chain disruptions that have been frequent consequences of the pandemic since 2020.

In America, soaring electricity, housing, and food costs saw its January 2022 inflation rate accelerating to 7.5%, its highest since 1982. Even though American companies are raising wages to fill vacancies from the Great Resignation, new wage levels still trail rising prices. Imagine having an annual 3% increment at your job — you’re still losing out!

Goldman Sachs predicts 7 interest rate hikes this year by the Federal Reserves in order to combat the rocketing inflation rate. Better start planning to pare down your USD borrowings before it is too late!

Closer to home, we need to adjust our future budgets to anticipate the impact of higher inflation on our own lives. But first, let us distinguish the difference between the Consumer Price Index (CPI) inflation and inflation as measured by the increase in your personal cost of living.

The government measures inflation by calculating the change in the average price of a weighted basket of goods and services i.e. the CPI. It works on the assumption that every person in the country consumes the same kind of goods and services. You may not feel that it applies to you, but this data point is crucial for economists.

What is in Malaysia’s CPI basket?

Malaysia CPI basket

Your personal cost of living, on the other hand, refers to the amount that your household spends on consuming goods and services. This includes the financial obligations that allow you to maintain a certain standard of living.

The CPI increased to 2.9% in October 2021. In December, CPI increased to 3.2%. The elevated levels of the CPI have been driven by rising fuel prices and the withdrawal of electricity bill discounts that had been granted during the earlier part of 2021. The price of fresh produce also went up significantly owing to poor harvests caused by unpredictable weather patterns, as well increased logistics costs. As mentioned above, supply chain disruptions in a globalised world have also contributed to the rise in inflation.

Despite concerns about inflation at 3.2% in 2021, the central bank has continued to maintain the interest rate at a record low of 1.75%. This interest rate will likely be maintained until the national Covid situation improves, and most likely until after a general election is called.

“National inflation for the period January to December 2021 showed a significant increase of 2.5 per cent as compared to a negative 1.2 percent for the same period in 2020,” according to a statement by the department of statistics of Malaysia.

To mitigate higher prices, the government has taken some steps to stabilize prices on “what we consider as crucial food items” such as rice and meat. By way of subsidies and by way of other assistance, the Malaysian government has promised that people “can buy food items and essentials at the prices that they can afford. Recently, the government announced that RM 680 million will be set aside in order to control the increase in prices in essential foodstuffs.

If you are still keeping your savings in a fixed deposit at 2% interest per annum, the value of your money is eroding every year. Here are some ways to beat inflation in Malaysia:

  • Look for an investment that will generate at least a 3.5% return per annum
  • Buy only local products which not only supports local businesses but helps your money stretch further – although many local products depend on significant levels of foreign inputs which are experiencing rapid price increases
  • Invest in real estate that you will live in. Consider withdrawals from your EPF account to pay down this debt in order to reduce monthly repayment.
  • Invest in good businesses with low capital needs
  • Invest in yourself to sharpen your skill sets
  • Avoid investment in traditional low-yielding bonds during inflationary period
  • Limit your wants and start budgeting to keep track of your finances

In addressing the issue of the rising cost of living, regulators need to enact multi-faceted policies to address challenges of urbanization in order to curb inflation:

  • housing and transportion (for connectivity)
  • improving financial education and awareness
  • enhancing productivity and
  • income improvement

The head of Malaysia’s trade union shared an insight that the country’s employers only spend 25% of GDP on wages, where the minimum wage is RM1,200.

Every time there is a call for minimum wage increase, employers fight tooth and nail – making them the stingiest employer in ASEAN.

There is much to be said for policymakers who should enact policies to shift the responsibility of raising the purchasing power of the society onto employers instead of creating a society that kowtow to debt.

With the current low wages, employees have no choice but to resort to debt or working multiple jobs in order to afford a liveable lifestyle in the city.

Greater effort by the regulators needs to be directed at increasing the productivity level of Malaysians through the adoption of modern technology and in advancing employees’ skill set.

This can be done through sector-led specialisation in education and training which would result in Malaysians moving up the value chain towards higher value-added jobs to achieve higher income and finally, afford a higher standard of living.

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