January 4th, 2012 by Hafiz Noor Shams
There are Malaysians who find it hard to accept the official inflation rate. They claim that it grossly underestimates the actual inflation on the streets.
Some of them are truly stubborn in the sense that no proof will convince them. Some derive their disagreement out of merely ignorance. Others raise nuanced argument against the official inflation rate as calculated from the consumer price index published by the Department of Statistics.
I typically dismiss the first two groups because I have learned to pick my fight over the years. For the third one, there is some concession to be made.
The truth is, the CPI itself measures the price levels of a basket of goods. The weight of each good depends on what the Department of Statistics thinks a typical Malaysian consumes. While there are ways to estimate the consumption of a typical Malaysian, it is quite easy to imagine and in fact it is the case that the hypothetical typical Malaysian differs from most of us. The difference depends on your preference for one. Your level of income for two.
Your preference is especially important. Do you smoke? Do you prefer bread to rice? Do you drink liquor? Do use your cell phone heavily? Do you drive? What kind of vehicle? Do you drive like a maniac or do you drive, like a friend of mine, like a grandmother? Are you an electronics freak purchasing every single new fancy gadget released out there? There are thousands of questions that if answered, they will reveal your consumption pattern.
The CPI has several components each representing a particular class of goods. These components are food, transportation, housing and apparels among others. There are 12 classes altogether. If you visit the website of the Department of Statistics, you can find out what is the exact weight for a particular component for the CPI.
So, really, you, provided that you accept the reading for a particular component, can construct your own CPI that will be different from the official CPI.
Change the weight according to what you think reflects your consumption. If you do not smoke or do not drink, put zero as the weight for alcohol and tobacco class. If you do eat out often at restaurants, increase the weight for that class. If you do not pay for any education service, put it zero. If you are taking one, then assign them accordingly. If you spend a huge fraction of your disposable income on food like a lot of low-income people, then give it greater weight. Etc. Then multiply the relevant weight to the relevant component index. Voila! Your own personalized CPI.
From then on, you can calculate your own inflation rate. Just do not do it the way Anwar Ibrahim did it or else you will piss off Mr. Hisham. You do not want to do that.
The point is, behind the fancy economics is just elementary mathematics. There is no magic behind it. You really do not need to be an economist to construct your own CPI and calculate your personalized inflation rate. Just understand the basics, and off you go.
If you do not know your weights, then run an experiment. Record your spending and consumption for a couple of months or more and then you can find the weights.
This way you will see how inflation affects you personally and more accurately. In fact, it will likely come closer to your expectation than what the official inflation rate tells you.
What it will not do however is to justify one’s unreasonable opinion that the inflation rate should be, for instance, 10% instead of 3%. Some think the statistics have been fudged to make the government looks good. To them I say you are free to have any opinion on any matter. But not all opinions are valid.