Discovering Malaysia's Actual Inflation Rate!

I'm sure that some of you would have heard from family and/or friends talking about Malaysia's "actual" inflation rate "supposedly" being much higher then the figures released by the Government. In my previous article, I wrote about the basics of GDP and it's relationship with inflation, this article would be about my own attempt to decipher the real "inflation rate" of our beloved country!

Malaysia's Inflation Rate as what we read on the Papers/Website:

Year	Inflation Rate
2003	1.07%
2004	1.42%
2005	2.94%
2006	3.62%
2007	2.03%
2008	5.40%
2009	0.60%
2010	1.70%
2011	3.20%
2012	1.20%

In terms of global ranking (lowest to highest inflation), Malaysia ranks 27 out of 224 countries. Looking from that perspective, many would consider Malaysia an affordable place to live in due to it's low inflation rate as compared to neighbors such as Thailand (ranked 80 at 3.10%) and Singapore (ranked 122 at 4.40%).

The real reason behind our consistently low inflation rate is due to the price subsidy that our Government provides on certain consumer goods. If you remember my previous article about inflation, the Consumer Price Index is dependent on the price of consumer products and services which would then reflect  upon the inflation rate of the country. When price of consumer products and services go up, so would the inflation rate of the country and vice versa.

While I laud the effort of the Government in trying to ensure that the "rakyat" is able to afford the basic consumers products, these subsidies are slowly eating into our country coffers. The very fact we are able to provide substantial subsidy for consumer goods is because of our good old Petronas natural resources (mainly oil). Imagine what would happen if our natural resources were to deplete 20 years from now?

What are the subsidized Consumer Products?
The list of subsidized products are shown in the table below:

How much is our Government spending on Subsidy?

This comes as a shock to me as well when I saw the figures. In 2012, the expected subsidy amount is RM22.79 billion! 

For 2011, the subsidy is RM22.52 billion in comparison to Petronas 2011 net profit of RM53billion.

What happens when the oil runs out?
Say for example that the government stop subsidizing these consumer products, what would the actual inflation be?

First we need to see the % subsidy for each consumer product which I have summarized in the table below:

Products	Actual Price (RM)	Price after Subsidy (RM)	% Subsidy
RON95	2.85	1.90	-33.33%
Diesel	2.82	1.80	-36.17%
LPG 10kg	32.84	19.00	-42.14%
LPG 12kg	39.41	22.80	-42.15%
LPG 14kg	45.98	26.60	-42.15%
Tepung	1.98	1.35	-31.82%
Gula Kasar	2.84	2.50	-11.97%
Minyak Masak	4.75	2.50	-47.37%

Next is to factor the % subsidy into Consumer Price Index (CPI) for 2012 as shown in the table below:

Products	Product CPI Weightage in % (A)	% Subsidy	Product CPI as 31 Dec 2012 (B)	Actual Product CPI Increase after Subsidy Removal ( C)	(D) = (A) x (B)	(E ) = (A) x (C )
RON95	8.77%	34.75% *	106.80	163.68	14.35	9.37
Diesel
LPG 10kg	0.46%	42.15% **	106.00	183.23	0.84	0.49
LPG 12kg
LPG 14kg
Tepung	0.37%	31.82%	100.50	147.40	0.55	0.37
Gula Kasar	0.25%	11.97%	136.90	155.52	0.39	0.34
Minyak Masak	0.50%	47.37%	100.40	190.77	0.95	0.50
		Sum			17.09	11.07
		Overall CPI Increase = Sum (D ) - Sum (E)			+6.02

*for ease of calculation RON95 + Diesel Subsidy are averaged out

** for ease of calcuation, 42.15% is taken as general subsidy for all 3 LPG products

Looking at column 2 of the table above, all 8 items contribute a total of 10.35% of the overall Consumer Performance Index. 

Once the subsidy is removed, the CPI for each of these product would increase (see column 5 of the table above). 

The increase of CPI for each product causes an increase in the overall CPI according to the respective % weightage. By making some simple calculation, we see that the overall CPI increased +6.02 points when subsidy is taken out of the picture.

What is the actual inflation for 2012?
To calculate the actual inflation, the following information are needed:
Overall CPI for Dec 2011 = 104.2
Overall CPI for Dec 2012 = 105.5
New Overall CPI for Dec 2012 = 105.5 + 6.02 = 111.52

Actual Inflation Rate for 2012 
= (New Overall CPI for Dec 2012 - Overall CPI for Dec 2011 ) / (Overall CPI for Dec 2011) x 100%
= (111.52 - 104.2) / 104.2 x 100%
= 7.02%*

Increase in inflation rate after subsidy removal 
= 7.02% - 1.2%
= +5.82%*

*The values obtained are based on simple rough calculation. These figures should not be used as actual facts.

Summary
The actual inflation calculated above is all but a rough figure estimation. These figures can only be used as a reference for readers to:

• select investments that could offer annual returns which are higher then the actual inflation rate of 7.02%.
• determine at any one time the actual inflation rate of our country by adding 5.82% to the inflation figure released over the news.
• ensure that your savings and investment is sufficient to support your livelihood in the event that the government is unable to provide anymore subsidy in the future.

Cheers and Happy Investing!

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