Rising Inflation and Escalating Cost of Living

By Yeong Pey Jung

January 2023 PENANG ECONOMIC INDICATOR
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SUSAN (not her real name) is a home caterer who started her own business after losing her job during the pandemic lockdown. Though business had been good at first, she began to really feel the pinch of rising raw material and food prices in 2022. “Food prices at the beginning of the year were very obviously lower compared to the last few months. My spending on the raw materials of my business has increased by at least 5% in recent months.” She says that she had no other option but to raise the prices of her catered meals, and as a result, had lost customers. Dining out has also become more expensive. “I could get a plate of char koay teow for RM5 or RM6 last year, but it is at least RM7 now – and that is on the cheaper spectrum.” 

But it is not only in food prices that she feels the burden. “Honestly, it feels like everything is just getting more and more expensive, and that includes things like household products and necessities.”

Along with the rest of the world, Malaysia has not been exempted from the battle against inflation. Inflation is often a global phenomenon, and with most countries lifting restrictions and reopening their borders after over two years, consumers are eager to resume their pre-pandemic life, and this includes travelling, shopping, dining out and so on. While aggregate demand for food and services experienced a rapid increase, the world market still struggles with pandemic-related problems such as labour shortage and supply chain constraints, which cause prices to increase.

The Russo-Ukrainian War is also a contributing factor to global inflation. With Ukraine and Russia being two of the world’s main producers and exporters of food products and necessities such as wheat, sunflower seeds, grain and fertiliser, the war has brought a plethora of problems to production and export.[1] The reduced supply in fertiliser, for example, quickly led to higher prices across the agriculture industry.

Oil prices were already high to begin with, due to post-pandemic increased mobility, but strict sanctions on Russia – one of the world’s major producers of fossil fuels such as crude oil – by Western nations, caused prices to soar to historical highs.[2] Higher logistical and transportation costs, in turn, have a domino effect on food prices.

In Malaysia, inflation rates are relatively low compared to the US and Europe. Figure 1 shows that year-on-year inflation was mostly on an upward trend since January, before dropping in September. Inflation started increasing sharply in May, rising by 0.5%, and the highest increase of 1% was seen in July.

On the whole, inflation was highest in the third quarter of 2022, averaging 4.5%. In comparison, the average inflation for the second quarter was 2.8%. Additionally, inflation for January until October averaged at 3.3% – one percentage point higher than for the same period of the preceding year.

Penang largely follows the inflation trend of Malaysia, albeit that it stays slightly lower than the national rate (Figure 3). The state’s inflation rate of 2.8% in the second quarter of 2022 was identical to the country’s rate, while in the third quarter, its rate of 4.3% was slightly lower than that for the country as a whole.

Penang’s average inflation for the period of January to October was 3.2%, which is 1.2% higher than the year before, in the same period.

Penang’s inflation rate is largely the same as similarly developed states (and federal territories) in Malaysia – Selangor, KL and Johor – as depicted in Figure 3, though Johor and KL saw slightly decreased inflation in March before increasing again. As the state with the most expensive cost of living (Putrajaya excluded), Selangor’s inflation rates are markedly higher. At 4.1%, Selangor’s average inflation for 2022[3], thus far, is 0.9% higher than Penang’s and 1.5% higher than its own 2021 average inflation in the same corresponding period.

Looking at individual items in the CPI basket for Penang, the main groups that have encountered the highest increases in their corresponding CPIs are food and non-alcoholic beverages, transportation, recreation services and culture, education, and hotels and restaurants (Figure 4). Food and non-alcoholic beverages as well as hotels and restaurants recorded the highest inflation rates among the groups, with the latter’s steady climb being caused by the reopening of borders and the rejuvenation of the tourism industry. Fluctuations in transportation costs are perceived to be caused by the instability of oil prices in the same months for 2021 and 2022.

The price of food and non-alcoholic beverages rapidly increased throughout 2022, especially that of meat and vegetables, which are often staple foods for Malaysians. Among Malaysia’s similarly developed states, Selangor, again, recorded the highest percentage change in food prices thus far[4], while Penang and Johor follow a similar pattern in price increases (Figure 3). KL’s food inflation rates remain lower.

The average inflation of food prices in Malaysia from January to October was 5.5%, a four percentage point increase from the previous year. While Selangor’s average food prices saw a 4.8% increase, Penang recorded the highest percentage change in average food prices, at five percentage points. The lower income groups are predicted to be most affected by inflated food prices, as they spend the biggest proportion of their household income on food.

Other than the Russo-Ukrainian War, domestically, labour shortages and the implementation of the RM1,500 minimum wage may also be possible contributors to inflation, as these would have added to production costs.[5]

The average headline inflation for Malaysia in 2022 is expected to be 3.3%.[6] Going into 2023, the inflation rate is estimated to remain high, with the ongoing Russo-Ukrainian War and its effect on global food and energy prices continuing to be a major contributing factor. Domestically, the stability of commodity prices and targeted subsidy mechanisms by the new government will also be determinants of the country’s inflation rates.

Footnotes:

[1] Markovitz, G. & Marchant, N. (12 May, 2022). Why is inflation so high and will it stay that way?, retrieved from https://www.weforum.org/agenda/2022/05/inflation-rising-economist-explains/

[2] J.P. Morgan. (12 March 2022). What’s next for oil and gas prices as sanctions on Russia intensify, retrieved from https://www.jpmorgan.com/insights/research/oil-gas-energy-prices

[3] Selangor’s overall inflation may be slightly inflated as data from January to May 2022 includes Putrajaya.

[4] Selangor’s overall food inflation may be slightly inflated as data from January to May 2022 includes Putrajaya.

[5] Nair, T. (1st July 2022). Explained: Rising food prices, retrieved from https://www.freemalaysiatoday.com/category/nation/2022/07/01/rising-food-prices-explained/

[6] Bank Negara Malaysia. (11th Nov 2022). Economic and Financial Developments in Malaysia in the Third Quarter of 2022, retrieved from https://www.bnm.gov.my/-/qb22q3_en_pr

Yeong Pey Jung

is a senior analyst with the Socioeconomics and Statistics Programme at Penang Institute. She is a reading enthusiast and is surgically attached to her Kindle.


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