IN line with the broader drive towards greater financial literacy as spearheaded by Bank Negara and the Financial Education Network (FEN), especially among the youth and younger generation (the millennials and Gen Z cohorts), and following the announcement of the reclassification of the household income categories, the Employees Provident Fund (EPF) in collaboration with the Social Wellbeing Research Centre (SWRC) of Universiti Malaya launched the Belanjawanku Expenditure Guide for Malaysian Individuals and Families 2022/2023 on June 13, 2023.

Via an app, Belanjawanku provides estimations of minimum monthly expenditures relative to income.

It comes at a time of persistent cost of living pressures emanating not least from a depreciating ringgit causing higher import prices – despite the fall in the Consumer Price Index (CPI)/headline rate to 2.8% in May.

But the reality is that the CPI isn’t being felt at all on the ground as evinced by complaints/grouses of periodic price increases by producers, retailers and consumers alike.

Core inflation was at 3.5%.

Indeed, the food and non-alcoholic beverages group remained stubbornly high and only eased to 5.9% (from 6.3% in April). Under the “food away from home” (i.e., eating out and takeaway) component, inflation rate was at a sticky 8.1% (remaining where it was in April). Increases in the sub-categories were seen in meat (7.8%); milk, cheese & eggs (6.5%) alongside rice, bread & other cereals (6.0%).

Sticky food prices mean that the Overnight Policy Rate (OPR) has failed in its objective of price stability in the form of reining in high inflation. When it comes to food inflation, we still have some way to go.

Moreover, this definitively implies that inflation expectations haven’t been anchored (at all). Hardly surprising as inflation expectations is a microeconomic analytical framework that’s more appropriate in very limited, i.e., specialised (and different) contexts only – in terms of the financial markets.

For example, bond traders would put in a bid for the volume and, by extension, the final coupon rate to be paid out based on their inflation expectations shaped by the official and de facto benchmark interest rate as calculated according to the net present value (NPV) and internal rate of return (IRR) – as discounting factors – forming part of a sophisticated valuation modelling, including accrued interest and encompassing yield curve analysis, and as conditioned by liquidity preference and taking into account floating and spot rates.

Beyond that, there’s no empirical evidence for inflation expectations (based on the broader rational expectations hypothesis/RATEX).

In fact, it’s the contrary.

Higher interest rate leads to higher cost of doing business (as per sellers’ inflation by Isabella Weber – where the markups are either to preserve or increase the profit margins). This is also where the cost of business (COB)-cost of living (COL) spiral takes place in line with the consecutive hikes, as per on-the-ground reality.

As evident from the food category and the sub-categories referenced above, there’s very little correlation between interest rate and inflation expectations.

In the case of the UK too, aggressive bank rate hikes for one year (which is well within the broad range of time lag where the impact on inflation is then supposed to set in) are now co-existing with a high inflation rate (as in CPI/headline) of 8.7% (as of May 2023 with core inflation at 7.1% and food inflation at 18.3%).

Even if we were to take another half year to allow for an 18-month lag as the rule of thumb typical in the central banking world, there’s still the fact that current levels of inflation are still persistent (never mind decreasing steadily even if still some way from the policy target of 2%).

Deflation – back to the policy target – as induced by monetary policy transmission can only result in a recession.

Back home, vegetable prices have more or less stabilised currently post-monsoon weather patterns but could increase overall again due to the impact of El Nino in the form of prolonged drought disrupted by intermittent heavy rainfall. The pertinent question is, of course, how would further increasing the OPR if at all (that’s being anticipated or even called on by experts) help to dampen inflationary pressure (in this regard)?

It's hoped that the July 6 decision by the Monetary Policy Committee (MPC) to maintain the OPR at 3% will be followed by a drastic cut before the end of the year given current and expected external headwinds.

As admitted in the MPC statement, “Global growth … remains weighed down by persistent core inflation and higher interest rates. China’s … pace of recovery has slowed in recent months … The growth outlook remains subject to downside risks, mainly from a slower momentum in major economies, higher-than-anticipated inflation outturns … and a sharp tightening in financial market conditions”.

Of course, Malaysia isn’t excluded, especially as an open economy heavily dependent on a current account surplus to bolster domestic consumption that’s constrained by weakening purchasing power, reduced savings, and high indebtedness.

Basically, we’re in the same situation as our major export partners too although not as bad (for now). It has to be mentioned that unemployment is also low in the UK (although has risen to 3.9%) and US (3.6%) unlike in the eurozone and the wider EU (at 6.5% and 5.9%, respectively). At the same time, inflation is 5.5% for the eurozone and 7.1% for the wider EU.

Yet notably, gross domestic product (GDP) growth for the UK in Q1 2023 was at a measly 0.1%. Although overall GDP growth for last year was 4%, this was set against real wage cuts of 2.6% and inflation rate in the double digits (e.g., 11.1% in October 2022). With a persistent current account deficit on the back of a weaker pound also with exchange rate pass-through (ERPT) implications for imports, this means that growth is driven by domestic consumption that’s eating into the disposable incomes of households compounded by highly leveraged mortgages. The City has also been experiencing capital outflows since Brexit due to relocation of financial firms and re-listings by companies to the EU and US.

The gap between wage growth and inflation debunks the mainstream thesis that since low levels of unemployment proves that inflation are mainly driven by higher demand. higher levels of unemployment are required to bring down inflation.

Thankfully Bank Negara doesn’t subscribe to such fallacy.

But the bottom-line remains.

Given the acknowledgement that income classifications need to be revisited to reflect the reality of the scarring impact of Covid-19, including supply-side shocks which generated high inflation alongside geopolitical dynamics (Ukraine), this means it’s the food price inflation that counts (and not the CPI).

As it is, food expenses can take up to 40% of the net income or monthly budget of the B40 and lower M40 groups.

In turn, food expenses need to factor in the following variables:

• A depreciated RM which impacts on our heavy dependence on food imports (60% as per DOSM) and where the balance of payments/BOP is consistently in a deficit;
• Scarring impact of Covid-19 resulting in reduced savings (as exemplified e.g., by the need for a staggering of four special EPF withdrawal schemes which in turn results in reduced retirement savings) to make up for loss or reduced income/earnings.
• The persistent “discrepancy”/gap between the CPI/headline inflation and food prices – which is amplified on the ground (i.e., the “real inflation rates”).

Food should, rightfully, be given greater weightage (conditioned by the weighted average) in any budget and expenditure guide.

This means aligning the proposed budget and expenditure guide with the cost of living and actual inflationary pressure (i.e., in reference to the food prices).

High food inflation reduces purchasing/spending power.

And then there’s non-productive consumer debt which reduces saving/accumulating power. 

According to the Malaysia Deposit Insurance Corp (PIDM), the millennial workforce in Malaysia is projected to rise to 75% by 2025. This means that the supermajority of the earners and spenders would be the millennials. Given their spending proclivities and habits coupled with the very low retirement savings of the mature workforce (71% can’t afford to retire adequately or at all), especially those nearing the official retirement age of 55-year old, we could be having a household debt crisis in the making.

Bank Negara has reported that 47% of millennials have high credit card debt – which implies that these economically productive youth with very low savings accruing or accumulating from their earnings are spending beyond their means.

At the macro-level, is it, therefore, realistic for the country to continue relying heavily on domestic consumption to drive economic growth as a percentage of GDP?

Fiscal space should be given for increased savings by households and individuals and increased spending by the government not only as off-set but also to enhance the purchasing power of the economy.

This can take the form of further tax cuts for the B40 (upper), M40 and the T1 of the T20.

The Ministry of Finance (MOF) should also consider increasing the personal income tax threshold from RM5000 to RM10,000, for example. 

Any introduction of a goods and services tax (GST) should be limited/confined and in hybrid form (i.e., with the sales and services tax/SST).

The government should conceptualise an economy that’s “dual-track” – where government operational and development expenditure not only spills over but precisely impacts on spending in the economy, either directly via procurement or indirectly via the cooperative economy (bulk purchasing on discounted prices which can then be passed on to members and wider consumers).

Through procurement, the government (directly or indirectly via government-linked companies/GLCs) should behave as the price-setter. It’s the government that determines and influences the market prices via its own purchasing power and not the other around.

This is precisely as embodied by the Ministry of Economy via the People’s income Initiative (Inisiatif Pendapatan Rakyat/IPR) and opening up funds for small local development projects to members of the public (by-passing the Works Ministry and, by inclusion, the Works Department) in conjunction with the district office and local council, inter alia. Currently, an anti-rent seeking (anti-Ali Baba culture) legislation is set to be introduced.

In parallel is the critical need for increased prudent and targeted spending by the government to mitigate and reduce the inflationary impact on the economy whilst simultaneously supporting the strength of the purchasing power (as embodied by the exchange rate).

This calls not only for maintaining subsidies in the long-term alongside their rationalisation coupled with welfare spending (e.g., cash aid) but also strategic investments in food security – which, of course, addresses the issue of food inflation, etc, respectively.

Lastly but not least, the government’s intention to implement a progressive wage model (which was first called for by EMIR Research more than a year ago in “Combine statutory minimum wage with progressive wage model too”, 23 March 2022) will boost wage growth for workers (other than the gig economy) and help cushion against the impact of inflation.

This is especially pertinent for the millennials and Gen Z, i.e., those who are of the younger cohorts in the jobs market.

It’s critical that for now, the budget and expenditure guide must be more realistic in order to highlight the gravity of their financial situation as well as that of the wider society.




Jason Loh Seong Wei is Head of Social, Law & Human Rights at EMIR Research, an independent think tank focused on strategic policy recommendations based on rigorous research.

** The views and opinions expressed in this article are those of the author(s) and do not necessarily reflect the position of Astro AWANI.