Our biggest problem is the cost of living crisis.

But how do we know whether or not this crisis is worsening?

Governments usually wheel out the inflation rate to gauge cost of living. Logically, if the prices of most things rise, then cost of living rises too.

But all numbers have their uses and abuses. Despite being used to estimate cost of living, the inflation rate is a flawed measure for doing just that.

What is inflation? 

Put simply, inflation is what happens when:

• Goods and services become more expensive, and
• Purchasing power – or how much a ringgit can buy – declines.

Often, inflationary pressures boil down to two things: demand-pull and cost-push inflation.

When “too much money chases too few goods”, as economists put it, extra demand pulls prices up. Conversely, when production costs increase thanks to factors like higher rent or raw material shortages, suppliers may push those extra costs onto consumers.

The post-pandemic era sparked a demand-pull and cost-push double whammy. More people are spending on the same things (like eating out post-lockdown).

Meanwhile, production costs have predominantly been on the up and up owing to a mix of higher oil prices, supply chain snags and snafus, and more industry-specific issues like heftier price-tags for chicken feed.

The consumer price index (CPI) tracks these price changes. The government monitors a fixed basket of goods and services, gives each category in the basket a weightage (for instance if the average consumer spends 30% of total expenditure on food, then food prices make up 30% of the basket), then calculates the average increase in prices for all categories.

When this average is compared to other time periods — say, last month or last year — we get the inflation rate.

But what the inflation rate doesn’t capture is equally important to understanding how dire or rosy Malaysians’ economic straits are.

The CPI and inflation rate track how much or how little, and how quickly or how slowly, prices rise.

But neither measures the bare minimum required to maintain a certain standard of living (that is, the actual cost of living).

For one, the CPI doesn’t account for increases or decreases in quality. Trends like shrinkflation thus fly under the radar. Malaysians might be paying more or the same prices for worse or smaller products and services, but the index doesn’t reflect this.

For another, the CPI gives the average inflation rate for all consumers in the country. But a 2014 Bank Negara Malaysia report highlighted that the CPI is a flawed proxy for cost of living when spending patterns across groups vary significantly.

This is because the inflation rate for separate groups differ and the cost of basic expenses across groups does too. Take healthcare costs. If it shoots up, pensioners must cough up more for cost of living compared to a B40 youth.

Neither does the inflation rate reflect the cost of a subsistence basket, made up of the bare necessities, because it’s tracking a broad range of goods and services in the economy.

What does this mean? Inflation and cost of living are related, but separate, economic events. Yet using the same statistic for both can lead to assumptions that lower inflation equals being out of the woods when it comes to the cost of living crisis.

But lower inflation is simply disinflation, or prices rising at a slower pace and in smaller increments, rather than deflation, where prices actually fall (though not without its own dangers).

Disinflation doesn’t necessarily mean that there’s a living wage in place, or that wages, pensions and social security nets are keeping up with current economic pressures.

Better metrics 

So what can we use to grasp a fuller picture of the cost of living crisis, if the inflation rate alone doesn’t cut it?

The closest thing Malaysia has to a selected living cost index (SLCI) is the Household Expenditure Survey but this is published twice every five years, compared to places like Australia with quarterly SLCIs.

The last living wage calculation by Bank Negara Malaysia in 2018, estimated a single adult in Kuala Lumpur needs RM2,700 to survive, but this is based on 2016 prices.

Pricechecker might enlighten the rakyat on market rates for goods, but Malaysia needs other numbers to provide a better idea of the cost of living in this country.

A more frequently updated SLCI for different sub-groups would help governments in setting more targeted economic policies.

It’d be useful for households, especially poorer ones, to better gauge their financial position, and there’d exist a concrete benchmark to hold politicians accountable for when it comes to undoing the years of low wages which make inflation harder to bear.