Tag: inflation

Categories
Economics

[2678] How have those CPI-components behaved?

The CPI for March was released yesterday.

Malaysia’s consumer price index grew by approximately 1.6% from a year ago. It is slightly higher than the inflation rate recorded in February, which was at about 1.5% from a year ago.

You can see which components contributed to the higher inflation, as well as the price behavior of all the CPI-components from November 2012 to March 2013 below.

CPI components Malaysia 2013

From the chart, you can guess which categories suffer from price controls and which ones do not: the ones with constant change are those which prices are controlled. The obvious one is the alcohol & tobacco category.

Here is the alcohol & tobacco category:

Alcohol CPI Malaysia

Alcohol and tobacco are subjected to punishing sin tax almost every year. The step-wise inflation rate reflects the controlled nature of the industry. It is so bad that the industry considers that if the government does not mention them during budget time, it is good news.  This happened in 2012 when the government did not increase the sin tax and hence, the prolonged zero inflation rate throughout 2012.

Nothing, really, shows the controlled nature of the category more than month-on-month rate:

20130418CPIAlcoholmomMalaysia

Each spike in the chart above corresponds to the increase of sin tax.

The transport also appears to be controlled. After all, fuel prices are largely controlled and it is reasonable to expect inflation in this category to be stable. It does seem so on this particular scale:

20130418CPITransportmomMalaysia

But it is just a case of bad scaling. After removing the 2008 outlier caused by government’s move to liberalize part of the subsidy regime, you can see the variation clearer:

20130418CPITransportmomcloserMalaysia

Part of the reason for the volatility in the transport category is that while fuel and public transport fee, which is part of the category, is controlled, the category also includes vehicle prices, which are not controlled. Controlled and uncontrolled items are mixed together under one roof.

Moving on, I have always wondered the reason why have clothing and footwear prices been coming down. And it is not a recent phenomenon. It has been going on for years.

CPI-inflation Clothing Malaysia

The same has been going on with communication category but for communication, fierce domestic competition is pretty much the answer. You can see the competition everywhere. For clothing, it is harder to see so.

I would guess it is the magic of globalization since clothing and footwear are tradable goods, especially with China is to the north. But that sounds too simple.

Categories
Economics

[2641] Will fewer zeroes do something positive to the rupiah?

I learned a few things in Indonesia. One of them involved the discussion of cutting down the zeroes in the Indonesian bills. Prices of goods and services will be adjusted accordingly as well.

Right now, the Indonesian currency the rupiah is denominated in the thousands and it is quite common to round up any price to the nearest 500 even when there are 200 rupiah coins circulating. And sometimes, even to the nearest thousands. As a foreigner unfamiliar with the rupiah, I almost protested each time that happened to me at the store in the three weeks I was there. Had I protested, I would have looked silly.

But what is the point of cutting down the zeroes?

There are several popular arguments for that and the biggest of among those is inflation. There is a belief that by cutting down the zeroes, inflation will happen at a more comfortable pace.

I do have trouble with that. Yes, I sat down on Kuta beach and thought of the problem, drawing chart in the sand under the Balinese sun. The water was cheery, the wind was nice and the sun was warm. The trees were swaying gently and the sand was fine.

Before I digress too much, the cutting down exercise essentially shifts the price level down. It does not specifically change the factors that cause inflation, like demand and supply. However the currency is denominated, if demand is strong and supply is short, inflation will be there.

A 4% to 5% inflation, the band which the Indonesia inflation has hovered in recent times, will still be 4% to 5% inflation whether the rupiah is denominated in the thousands, millions or tens. The absolute value will be big at the higher level but then again, the right denomination can address that painlessly: it makes inflation independent of the denomination.

Then, I started to think about the possibility of heteroskedasticity. That mouthful word describes a situation where there is more volatility at greater level. For example, at the level of 1, the data may fluctuate by 5% around the number 1. At the level of 1 million, it may fluctuate by 10% of around the number 1 million. This is known to happen with a lot of financial data. I am unsure if it is true for inflation as well and I have not checked it. I did a search on it and… things that came up are not stuff I want to read at the moment. All I want to do right now is blog and not mess up my head by too much.

Theoretically, it is hard for me to see how the level may affect inflation. The empiric may have something else to say.

The theoretically respectable way to have a change in level to affect inflation is to use the expectations channel. Consumers must somehow believe that a change in level affect inflation so that post-change, inflation will be lower. But there is a problem with this: like I said, the factors that affect inflation does not change (given the denomination is optimal, which is easy to achieve) and the issuer of the new money, Bank Indonesia, will still be as credible as the issuer of the old money. So, how exactly will a new denomination affect expectations?

I do not know.

So, the realistic way is to follow the empirical route and see if there is heteroskedasticity. But I am abusing the term a bit here. I am not thinking specifically about heteroskedasticity. I am just thinking that inflationary pressure or expectations might be greater at higher levels.

If that is the case, then the exercise may help fight inflation. If it does not, then I think the exercise is not ideal.

The next big point of it is really cumbersomeness of big bills. But during the weeks I was in Java and Bali, I found that the rupiah was easy to use. Indonesians and others have adapted to the denomination and the price level quite well. I would think given the prevailing price level in Indonesia, everybody would carry big bills around like during the disastrous era of the Weimar Republic or Japanese Malaya. But inflation in Indonesia is respectably okay at the moment. So while Indonesian denomination is big compared to Malaysia, stable prices mean these Indonesian bills will not lose its value quickly. The big numbers on the bills mean something, unlike in the Weimar Republic in the 1930s.

When I was there, I typically brought along 50,000 bills mostly because that is the lowest denomination the ATM spits out. Apparently, the optimal bills to carry around are 5,000 and 10,000. And it is not really cumbersome. I had 2 million rupiah in the wallet and the wallet looked thin.

Given the price level, the denomination of the Indonesian currency and the current inflation rate, the society is adapting extremely well to the situation. So, there is no need to cut down the zero. It is, after all, just zeroes on pieces of papers that appears to exact negligible cost to economic activities. Things are going fine as it is. So, I do not think the one-off adjustment cost associated with the cutting exercise is worth the effort, if cumbersomeness is the concern.

Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved
p/s – in fact, Bank Indonesia plans to re-denominate the rupiah beginning from 2014. The exercise may be completed by 2016. The current denomination will be slashed by the thousands i.e. 1,000,000 will become be 1,000 once the exercise is complete.

Categories
Economics Politics & government

[2640] Welcome back, LDP

I do not understand the intricacies of Japanese politics. I simply do not follow it closely. But I do know that Japan can play a significant role in Asia, if it finally decides to take up that role, which it has not under the uncertain leadership of the Democratic Party of Japan.

The DPJ wanted a closer relationship with Asia and less of the US. Contrary to what it hoped to achieve, a DPJ-led Japan has not successfully engage China and Japan now needs to forge a strong relationship with the United States in time when China is rising and growing more assertive against its neighbors. DPJ’s economic management itself has not been stellar but I think there it is unfair to blame to DPJ for that.

Unhappy with China, I welcome the reelection of the more conservative Liberal Democratic Party and a Japan with a backbone. That is so because it is almost certain that the LDP will strengthen its relationship with the US. With a stronger relationship with the US and a strong US presence in East Asia (and Southeast Asia), hopefully China will think twice in asserting its weight around the region. China has been an irresponsible giant so far, escalating crisis when a mature power would have handled it with care instead. For instance, is it really necessary to send a plane over the Senkaku islands?

A more hawkish (not too much I hope) Japan will tell China that it cannot bully its way through the region any longer. Rather than a hawk-dove strategy, now China faces a hawk-hawk scenario, which is more complicated and may force China to rethink its assertive, bullying regional policy into something more cooperative and amiable.

A hawkish Japan does have its own problem but at the moment, I do want a Japan that is willing to stand up in the region. China needs to learn that its bully tactics does have consequences and an LDP Japan can push back and say, no, play nice.

One big issue with LDP is its economic policy of Japan. First is the government interference in monetary policy. The Bank of Japan is losing its independence with the government trying to force the central bank to target for higher inflation rate. While I do think Japan needs a bit of more inflation, I am unsure how the interference will pan out. Lack of independence can be a recipe for too much inflation. There is some nuance in the interference in the sense that LDP government wants a stricter (but higher inflation) rule for the BOJ to follow but it does create a precedent of interference nonetheless.

On the same track, the LDP government will embark on a massive stimulus program to revive the economy. I prefer monetary to fiscal stimulus. The preference presents me with a problem: BOJ itself is too conservative to my liking and that probably makes the executive infringement into monetary policy somewhat palatable. Nevertheless, with expansive and coordinated fiscal and monetary policies, I suppose you will get inflation.

Finally, while I welcome the return of the LDP, I do not think the election of DPJ was a mistake. The Japanese system needs a shake-up and the DPJ did just that, even if it did not fulfill its promise. Being in power for too long can be dangerous to a political culture because it implants the party into the state apparatus. For a healthy democracy to prevail, the state has to be ultimately separate from the party. In the case of Japan, there is an additional dimension: the civil service is too influential. From my readings, the DPJ did have some successes in reigning the influence of the Japanese civil service, and that is good.

Categories
Economics

[2627] Does inflation hidden between the CPI and GDP deflator explain the CPI dissonance?

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]

Categories
Economics

[2579] Far higher potential output for Malaysia?

Both the GDP and the CPI numbers for Malaysia were released yesterday.

Real GDP growth grew by 5.4% in the second quarter from a year ago. Although I suspected that growth would be strong due to strong showing in the industrial production index, I found 5.4% as surprising still. It was too strong for whatever the production index was showing.

The strong growth, along with low unemployment rate, provides a puzzle when it is considered together with inflation trend. Inflation in Malaysia, both headline (1.4% in July from a year ago) and core (1.3%) inflations, has been decreasing since the beginning of the year. Typically, strong growth creates demand-pull inflation. That demand-pull inflation has been absent in the second quarter despite strong GDP showing.

Furthermore, the unemployment rate has been low and I tend to consider the current rate to be quite close to the idea of full employment.  The latest employment rate, which is for the month of May, is 3.0%. Previously, the rate hovered between 3.3% and 3.1%. Labor participation rate is also quite high given historical standard. The assumption of full employment implies the economy has been working close to its full potential. Any growth stronger than the potential will put upward pressure on prices.

Yet, inflation, especially core inflation, has been decreasing throughout the year.

This may suggest that the potential output is higher than the growth the Malaysian economy has been experiencing so far. It also suggests that the already low unemployment rate can go down further and that we are not really that close to full potential.

So, Malaysia can grow faster still, which is an exciting realization. I heard of the go-go 1990s. Maybe, it is time for the go-go 2010s in spite of everything. Let us just hope things will not go down in flame like it eventually did in the 90s.

Whatever it is, if growth so far has been unsustainable, then inflation should accelerate in the near future. If it is sustainable (i.e. actual growth is lower than potential), we should see only limited demand-pull inflation.

Finally, I previously projected the Malaysian economy to grow by 4.0% for the whole of 2012. I am looking like a fool now and will be looking to upgrade the growth rate soon. Nevertheless, I am ultimately skiddish about that upgrade. Although domestic demand, which grew by 12.0% year-on-year, has proven to be capable of cushioning the adverse impacts from weak exports, the global risk is still there. Trade has not collapsed but it can and if it does, an upgrade will be a very foolish thing to do.