This article first appeared in The Edge Malaysia Weekly on December 26, 2022 - January 1, 2023

INFLATIONARY pressures have pushed the cost of living so much to the forefront in 2022 that it has become the key issue for most Malaysians and, consequently, the foremost issue for the new unity government.

The dilemma is the culmination of several factors. Among them is the resurgent US dollar, which has resulted in the ringgit averaging 4.40 to the greenback, and touching a new record low of 4.744. Import costs have escalated, and at a time when oil prices also rose to multi-year highs, the prices of other key commodities have risen in tandem.

Bank Negara Malaysia has guided for headline inflation in 2022 to average slightly above initial forecasts, to a five-year high of 3.3% year on year. In August, the Consumer Price Index (CPI) rose to a high of 4.7%.

Even so, in part because of hefty subsidies, particularly for fuel, Malaysia’s annual CPI figure is still considerably lower than that of its neighbours such as Singapore (projected at 6%), Indonesia (6.6%-6.8%) and Thailand (5.5%-6.5%).

However, the headline CPI does not tell the whole story. Tracking global trends, inflationary pressures in Malaysia were led by prices of food and non-alcoholic beverages, and transport costs — two items that take up two-fifths of B40 income, according to Khazanah Research Institute (KRI) data.

Furthermore, only 20% of food imports show up in the CPI basket even though Malaysians are greatly affected by rising global food prices as the country is a substantial net food importer.

As Bank Negara pointed out in its 2021 Annual Report, the implication is that when price pressures are driven by food items, cost of living pressures are disproportionately experienced by lower-income households.

To be sure, the situation is not unique to Malaysia. A similar household expenditure trend is seen in the US, where on average 60% of income is spent on food, transport and housing, according to data from the US Bureau of Labor Statistics.

“Food items [in Malaysia], in some cases, have gone up by as much as 20%. Many even in the M40 spend most of their income on food and transport, which means purchasing capacity has been severely reduced,” Malaysian Institute of Economic Research (MIER) senior fellow Dr Shankaran Nambiar tells The Edge.

To cushion the impact, the government subsidised multiple food items during the price surge this year, including chicken, eggs and cooking oil. It also provided record subsidies on key items, including petrol, diesel and liquefied petroleum gas (RM37.7 billion) and electricity (RM5.8 billion). In total, Malaysia’s total subsidy in 2022 of RM77.7 billion amounted to some 27% of projected federal government revenue of RM285.2 billion. This is clearly a situation that cannot be sustained.

Dr Yeah Kim Leng, professor of economics at Sunway University Business School, sees inflation in Malaysia at 3.5% this year despite the subsidies. This is “substantially above the five-year trend of 1.3% per annum”, he tells The Edge.

“The rise in inflation invariably results in higher cost of living but the actual impact varies across households depending on factors such as income level, location, consumption pattern and lifestyle, family size and age profile,” Yeah adds.

It should be noted that while the focus has been on food and transport, inflation is also creeping up in other components, including health (1% in October) and education (1.4%) — both at their highest increase since the pandemic.

Despite the low weightage of the two components in the overall CPI, any increase would be felt more keenly by the lower-income groups in particular.

Datuk Paul Selvaraj, secretary-general of the Federation of Malaysian Consumers Associations, pointed out in a recent open letter lauding government ambition to combat cost of living issues in the country, that cost of living “encompasses the issues of income and social protection, food availability and affordability, affordable housing, reliable public transport, accessible healthcare, affordable childcare services, and affordable internet services”.

In short, he stressed it should include the empowerment of consumers.

Moving forward, the government has initiated a more targeted subsidy mechanism for electricity usage. While households, small businesses and certain agricultural and food manufacturing companies will receive a subsidy, a higher surcharge will be imposed on high voltage users that are typically exporters and large corporations.

Prime Minister Datuk Seri Anwar Ibrahim is also continuing previous government measures of cash handouts to the vulnerable groups, the first phase entailing RM2 billion for nine million recipients.

Taking a more hands-on approach, he is chairing the National Action Council on Cost of Living (NACCOL), which develops, implements and monitors action plans on cost of living issues with the participation of various ministries and subject matter experts.

The Ministry of Human Resources with the Social Security Organisation (Socso) have also improved on the Housewives Social Security Scheme (SKSSR), which provides coverage extending to illnesses and invalidity, at just RM120 per year or RM10 per month.

However, for the lower-income group, signing up for such protection would mean less money is available for basic necessities such as food, shelter and transport.

Thus, the other side of the equation must be addressed, namely income growth. While wages grew by an average of 9.1% in 2021 based on Department of Statistics Malaysia (DOSM) data, the situation is not equal across the board.

According to DOSM’s Household Income and Basic Amenities Survey Report 2020, a fifth of households from the M40 group have fallen into the B40 group following the Covid-19 pandemic and its fallout.

“Income increases since the pandemic for the B40 group are much smaller in absolute amount than the higher-income groups, thereby perpetuating the ‘bread and butter’ or livelihood issues facing a large segment of the population,” observes Yeah.

Malaysia’s minimum hourly wage (US$1.84 based on the exchange rate at the start of 2022) is still behind the likes of Turkey (US$1.93), Brazil (US$2.18) and South Korea (US$6.84), according to DOSM data.

At RM1,500 per month, Malaysia’s minimum wage is not far off from the pre-pandemic income of RM2,160 for 50% of the employees in the country. To put things into context, Bank Negara had proposed a “living wage” benchmark of RM2,600 in 2018.

“The consumption pattern of households in the middle 50%, with equivalised income between RM1,196 and RM3,015, appeared to be remarkably similar and exhibited trade-off in their consumption patterns,” KRI said in its presentation deck for its 2019 report “B40 & the Demarcation of Malaysian Households”.

The bigger impact of low wage growth is less savings and more vulnerability to rising prices, says Yeah. “Although the economy has since recovered from the job and income losses, many low- and middle-income households’ savings and financial status have weakened considerably,” he stresses.

RinggitPlus Malaysian Financial Literacy Survey 2022 found that 70% of Malaysians saved less than RM500 per month in 2022, or did not save at all. This compares to 52% of Malaysians in the same category in 2021. The year-on-year increase was the largest since 2018, the survey found.

While economists and analysts say that global inflation should peak in 2022, inflation is also expected to be stickier in the medium term. Bank Negara has projected Malaysia’s CPI next year at 2.8%-3.3%, a similar band to this year’s forecast.

On the growth side, the picture is not as rosy either as the central bank expects gross domestic product growth to moderate to 4%-5% in 2023, from its 2022 projection of 5.3%-6.3%. And domestically, there are other near-term headwinds.

“I expect that the levels of hardship will increase with the floods and the damage they will cause,” Shankaran says, referring to the monsoon floods that are currently severely affecting east coast states. The damage could be substantial given that the great flood of December 2021 to January 2022 inflicted RM6.1 billion in damages, not to mention the lives lost.

“The continuous rains will also affect the production of vegetables, resulting in a further increase [in prices] over the next month or so. So you can expect cost of living and inflation to continue being an issue … it might be more of an issue going into next year when growth declines,” Shankaran adds.

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