I have argued before that too many disbelieve the CPI inflation because they do not understand how inflation is measured. Some do not get the fact that CPI inflation is the change in price level and not the price level itself. Too many think that it is impossible that inflation is really that low in Malaysia when prices have jumped up so much over the years. They essentially compared prices to a different base than that used by the CPI and failed to take that difference into account. Others are just too stubborn that they express disbelief but they are unable to systematically justify their disbelief other than resorting to rhetoric. While this is a trivial macroeconomic issue, it does have real political implications in Malaysia unfortunately. This really highlights importance of communication between economists and the lay public in Malaysia.

Lars Christensen, an economist and a giant in the market monetarist circle, may have implicitly provided another explanation to describe the discrepancy between CPI inflation and the disbelieving sentiment on the ground.

He suggests that price controls are causing a wedge between CPI inflation and GDP deflator change.[1] If there were no controls, the CPI inflation and the GDP deflator change should have moved in tandem. So, price controls are suppressing the CPI inflation (because price controls target goods consumed locally and CPI measures good consumed domestically while GDP deflator is more descriptive of prices all of Malaysia because it measures prices of good produced locally regardless where it ends up). The claim on inflation suppression (by price controls and not the data itself) is completely uncontroversial.

So, as Christensen puts it, the difference between CPI inflation and GDP deflator change is hidden inflation. Would be it possible that despite the official CPI figures, the consumers feel the pain from the GDP deflator?

While this can be used to describe the dissonance between the official CPI inflation rate and disbelief on the ground, there is an obvious problem to the implicit explanation of the dissonance. Consumers do not face prices as measured by the GDP deflator. They face prices measured by the CPI instead.

Christensen does not explicit use the term hidden inflation in the same context that I am framing the issue. He uses it to describe the problem of shortage of controlled items, which does happen from time to time in Malaysia. I am just preempting any argument that may come out to explain the CPI dissonance that may originate from his points.

My view is that the CPI inflation is right and the reason for the disbelief has more to do with the fact that many do not understand the CPI. Furthermore, some components of the CPI are growing faster than the overall CPI and this might have contributed to the disbelief. In this sense, the pain index designed by Hisham of Economics Malaysia is helpful in addressing the disbelief.[2]

Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved
[1] — The Christensen family arrived in Malaysia yesterday. It is vacation time! So since I am in Malaysia I was thinking I would write a small piece on Malaysian monetary policy, but frankly speaking I don’t know much about the Malaysian economy and I do not follow it on a daily basis. So my account of how the Malaysian economy is at best going to be a second hand account.

However, when I looked at the Malaysian data something nonetheless caught my eye. Looking at the monetary policy of a country I find it useful to compare the development in real GDP (RGDP) and nominal GDP (NGDP). I did the same thing for Malaysia. The RGDP numbers didn’t surprise me — I knew that from the research I from time to time would read on the Malaysian economy. However, most economists are still not writing much about the development in NGDP.

In my head trend RGDP growth is around 5% in Malaysia and from most of the research I have read on the Malaysian economy I have gotten the impression that inflation is pretty much under control and is around 2-3% — so I would have expected NGDP growth to have been around 7-8%. However, for most of the past decade NGDP growth in Malaysia has been much higher — 10-15%. The only exception is 2009 when NGDP growth contracted nearly 8%! [Lars Christensen. Malaysia should peg the renggit to the price of rubber and natural gas. The Market Monetarist. November 15 2012]

[2] — Inflation as measured by the CPI is up 1.6% in annual log terms, but my core inflation measure (CPI ex-food, ex-transport) decelerated to 1.1% from 1.2% from April’s reading. Price’s are up from the month before, but not by much — not so coincidentally, the Ringgit has been falling slightly against major currencies, so some pass through of inflation is to be expected. But the magnitude of price increases is still far below what people seem to feel is happening to their monthly household bills.

To get a feel for this, I’m going to invert the components of my core measure — instead of excluding the more volatile components to arrive at a stable long term inflation measure that’s useful for policy analysis, I’m going to exclude the non-volatile components instead i.e. measure inflation based exclusively on food and transport prices, which is more representative of what’s happening to people’s wallets.

You could call this the ”Pain” Index [Hishamh. May CPI: Measuring The Pain. Economics Malaysia. June 21 2010]

Trackback URI | Comments RSS

Leave a Reply