INFLATION RATE computation by Bank Negara Malaysia is done on an overall manner for a COUNTRY, while each one of us on INDIVIDUAL level, will still experience different inflation rate.
YES, we can trust Bank Negara Malaysia computation of inflation rate as it is done based on basket of goods changes in price for a COUNTRY. The computation includes both urban and rural area, as well as high and low income individual. However, at individual level, the allocation of our income on our goods is different for each person. For example:
Adrian spend his 30% of his income on entertainment and 50% on food & beverages (particularly 20% on alcohol); Daniel spend his 30% of his income on education and recreation and 50% on housing and utility. Between us, our sensitivity to certain price of goods are different. Adrian has sensitivity to movie ticket price and alcohol price whereas Daniel has sensitivity to education fees and gym member fees. Different price changes of these goods cause different biases of inflation of individual.
In economics, there is always a fine line between perception (consumer biases) and reality. Whether the official CPI inflation is a reflection of the actual change in cost of living is one of those pertinent issues. Despite the relatively low CPI inflation in the past two years (2% -3%), the experiences of the general public suggest that the cost of living has risen more significantly. Therefore, there remains skepticism that the CPI has good representation of changes in cost of living in the country. There are 3 factors that lead to disconnection between the cost of living and the reported CPI inflation.
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FIRST, cost of living and inflation are two different concepts as highlighted in the Box Article: Inflation and Cost of Living in the Annual Report 2015. CPI inflation is computed based on a single basket of goods and services. It reflects average consumption patterns of the Malaysian households and average prices in the economy. The overall CPI inflation would not reflect the individual cost of living , because there are differences in spending patterns and prices in various locations.
Besides that, CPI is also a relevant indicator for the conduct of macroeconomic policies, such as monetary policy, that aim to affect the broader economy.
SECOND, while CPI only considers the annual rate of change in prices of goods and services, the discussions on the issue of cost of living also take into account the income perspective. Households feel the pressure of rising cost of living not only when costs increase, but when incomes do not rise in tandem. This leads to decreasing purchase power.
Third, the public perceptions on price increases are also subject to several natural biases. This is because consumers have different sets of information than the ones used to compute the CPI when forming perceptions. These sets of information comprise of initial beliefs, social interaction with other economic agents and life-time experiences. The biased perceptions could influence consumer’s expectations of future inflation, and in turn would change consumption and investment decisions. In this regard, understanding public inflation perceptions is important so that central banks are able to develop effective strategies to anchor inflation expectations.
One could go BNM website and check the consumer price index latest economic data HERE.
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