THERE SEEMS to be no end to the spiralling cost of living for consumers. The expected price hikes when the Goods and Services Tax (GST) kicks in come April is already a big dampener, but now, consumers’ spending power is being further sapped by the depreciating ringgit.   

Meanwhile, any regular patron of the neighbourhood market would tell you that the prices of vegetables have escalated over the last few weeks as the rains impeded production and hindered transport. However, it has been reported that the increase in prices as a result of the monsoon will last no longer than three months.

Less apparent is the potential increase in costs brought about by the weakening ringgit, especially for certain types of imported goods. Economists’ expectation is that the ringgit will remain weak this year, hovering around 3.4 to 3.5 against the greenback.  

The ringgit has fallen 10% since June last year, hitting a five-year low of 3.5862 against the US dollar last Thursday.

It is worth noting that as at end-2014, the country’s foreign reserves fell 14% year on year to its lowest since March 2011, indicating that Bank Negara Malaysia may have intervened to support the ringgit.

Economists opine that the impact of the stronger US dollar on inflation will be manageable as the increase in food prices can be negated by the slide in commodity prices.

“Inflation is measured by the Consumer Price Index. Within the CPI basket, transport has declined as a result of lower oil prices. So, this will be able to offset the increase in food prices, but it will not be offset completely. We will still see a push on inflation,” says Alliance Research economist Manokaran Mottain.      

Based on historical trends, an increase in fuel costs has always led to a spike in food prices. Sadly, food prices tend to be “sticky downwards”, say economists. But with fuel prices lower now, it should serve as one less reason for traders to raise the prices of goods.  

RHB Research Institute says in a report that the managed float fuel price scheme implemented by the government, along with the weak crude oil prices, could reduce the impact of the GST on consumers.

Furthermore, its chief economist Lim Chee Seng says falling prices are seen not only for crude oil but also for other commodities. The overall impact should keep inflation manageable, he adds.

Nevertheless, headline inflation for last November rose 3% compared with 2.8% in October and 2.6% in September.

“The higher inflation rate in November was reflected in a faster increase in the core inflation rate, largely due to a sharp rise in the prices of alcoholic beverages and tobacco. This was exacerbated by an increase in the prices of food and non-alcoholic beverages during the month,” says RHB Research in a recent report.  

The research house is expecting inflation to rise to 3.8% in 2015 from an estimated 3.2% in 2014.

While many would think that the weakening ringgit will only impact those who consume more imported goods  — meaning the rich  — Lim says the middle to low-income earners will feel the pinch as well.

“It is not easy to generalise who will be impacted most by the weak ringgit. Yes, those who consume more imported goods will feel it more. However, from the spending power perspective, the middle to low-income earners, who may consume less of imported goods, will feel more of the impact on their income compared with the higher income group, who have more money to spare,” he explains.

Alliance Research’s Manokaran opines that the middle-income group, in particular, will feel the brunt of the depreciating ringgit. He reasons that the lower-income group hardly consumes imported goods and thus, should not be affected by the rising costs of imported items. Whereas the middle-income group, who would spend more on imported goods compared with the low-income earners, will see their purchasing power dwindle faster than before.  

Perhaps, middle-income earners would not only have to give up their preference for foreign branded goods but also scale down their holidays abroad should the ringgit continue to be decline and salary increments lag behind.

A salary hike?

Comparing dollar-for-dollar cost of living between Kuala Lumpur and Singapore, the prices of most staple food items in the city-state tend to be cheaper (see chart).

A gym membership, which would be considered a luxury item for many, is also found to be cheaper in Singapore.

The only downside in Singapore would be its rental rates, which are higher compared with those in Malaysia. However, it should be highlighted that the average household income in the city-state is S$10,500 (RM27,900), compared with Malaysia’s RM5,900.   

Recently, several groups were reported to be urging employers to raise the salaries of their employees by 6% to mitigate the impact of the GST.

This, RHB Research’s Lim says, would not be enough for the middle to low-income earners to combat the rising cost of living. However, he adds that the definition of “enough” is subjective as other factors would have to be considered as well.

“We have to look at the other side of the coin as well and take into account issues like the rising cost of doing business,” he says.

Manokaran concurs, saying that companies would also have to consider their profit margins. Also, he does not believe that salary increments would be able to match up to the impact of the GST.

Lim says wages and productivity have to go hand in hand.

“Malaysia’s wages to gross domestic product ratio is 33%, while Singapore’s is 44%. However, Malaysia is one of the countries with the lowest productivity among emerging markets,” he adds.   

At the end of the day, consumers will ultimately be left worse off compared with before as the gap between the rising cost of living and pay hike widens.  

This article first appeared in The Edge Malaysia Weekly, on January 12 - 18 , 2015.

Save by subscribing to us for your print and/or digital copy.

P/S: The Edge is also available on Apple's AppStore and Androids' Google Play.