Food, Fuel, and Us

The Consumer Price Index (CPI) which is commonly used as a measure of inflation might not be a correct representation of the way inflation affects us. The calculations of the CPI may be distorted because it is the average price of goods and services purchased by households when the inflation may be in products that people cannot live without (fuel and food).

Furthermore, another reason the CPI looks so reasonable is due to the Moore’s Law, a prediction (now proven very true) that in every two years there will be an increase in computing power and a decrease in price of computers.  This is reinforced by the fact that the cost of optional purchase like computers, televisions and other electronics dropped about 50% in recent years.

            The spiking food and fuel prices are caused by many hidden and interrelated reasons. With the US dollar falling to a record low against the Euro, investors are seen to channel their funds into oil and other commodities (like gold) to hedge against inflation. Food prices on the other hand is seen to increase because of supply shortages due to poor weather and increased demand for traditional food items such as corn and wheat.

            Malaysia with its subsidies does not escape the rising international price levels of food and fuel. The Consumer Price Index, CPI (the most widely used indicator and measure of inflation in Malaysia) shows us on the surface that inflation is under control. However, a deeper look into the matter through the Household Expenditure Survey (HES) by the Department of Statistics, Malaysia may show us some interesting information.

According to the Household Expenditure Survey, the main expenditure of households would be centered on four categories firstly, food and non-alcoholic beverages, secondly, housing, water, electricity, gas and other fuels, Third, transportation and fourth, restaurants and hotels. A further breakdown on this four categories in terms of income levels from below Rm 500, Rm 500 to Rm 4,999, and Rm 5,000 and above shows us that poorer individuals (below Rm 500) spends 38.8% of their household expenditure on food and non-alcoholic beverages compared to the richer individuals (above Rm 5,000) that spends 9.4% on the same items.

Further results from the statistic shows us that poorer individuals (below Rm 500) spends only 4.2% of their household expenditure on transportation compared to the richer individuals (above Rm 5,000) that spends 27.8% on the transportation. This indirectly and ironically shows us that our painful fuel subsidy (Rm 16 billion, January-August 2007) helps the rich more than the poor.

            The Consumer Price Index does have its limitations especially in the sense that it is intended to measure inflation and not the cost of living. Because the index is designed to provide a broad indicator of changes in retail prices faced by general households in Malaysia, it will not reflect the general cost of living of individuals. Should the Consumer price index be separated based on income levels or even regional areas (for example, rural and urban households), the results would be drastically different.

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