The Proposition
Inflation rate: Calculations are correct
BEING the Department of Statistics' senior director of the prices, income and expenditure division, Kamarudin is the man of the moment.
Q: There are claims that the way the inflation rate is calculated is wrong. What do you say?A: Our inflation rate calculation is correct and so are our economic growth figures.
In 2007, the rate of inflation increased by two per cent over 2006's CPI of 103.5. But compared with 2005, there was an increase of 5.7 per cent.
In the first four months of this year itself, there was a 2.7 per cent increase compared with the first four months of last year.
Just for food and non-alcoholic beverages, the index increased by 4.7 per cent in the first four months of the year compared with 2007. The highest increase was seen for milk, cheese and eggs.
Overall, 31.4 per cent of the composition of the basket is for food and non-alcoholic beverages, while 21.4 per cent is for household expenditure and 15.9 per cent is for transport and fuel expenditure.
Some of the other items in the basket include health, education and entertainment.
Q: So are the weights allocated for the categories in the basket proportionate?
A: Yes, they are. We collect 460 main items and 920 sub-items. Using the fish example mentioned, we collect 34 types of fish. I don't understand what other types of fish you want us to collect.
Even for milk, we collect 13 types, including two infant formulas.
We conduct the Household Expenditure Survey (HES) every five years to know what Malaysians are spending on.
The weights used in the calculation of the CPI are obtained from the HES.
There are 12 categories of items in the basket based on the United Nations' "Classification of Individual Consumption According to Purpose".
Q: How do you decide on the weights?
A: We obtain this from the HES. The last one was in 2005 and we surveyed 25,000 households nationwide from all income brackets over a period of a year.
From the data collected, we found that 31.4 per cent of household expenditure was on food. So these weights decided upon are from the people.
Q: Should the HES be conducted more frequently? Isn't five years too long a period?
A: Yes it should, but it costs RM15 million to conduct just one survey. So it is too expensive to conduct one annually and it also involves government policy.
Q: Do the weights change much every five years?
A: Yes they do for certain categories.
In 2000, the weight for food and non-alcoholic beverages was 34.9 per cent, while for the current basket, it is 31.4 per cent.
For transport, it was 13.9 per cent in 2000 and it increased to 15.9 per cent in 2005.
For restaurants and hotels, the figure was 1.9 per cent in 2000, while for 2005 it increased to three per cent.
As people become more affluent, they spend less on food and more on other items.
Q: Malaysia's closest neighbours record much higher inflation rates. Why does it seem that we are isolated from the true scenario?
A: Among the Asean countries, we do have one of the lowest inflation rates. This is without taking into account the recent fuel price hike.
Singapore and Thailand have different scenarios.
When the price of petrol goes up, their governments do not subsidise the rates, so transport costs there are determined by market prices.
Therefore, the rate of inflation rises. But for us, the government subsidises petrol costs up to a limit.
Q: Do you expect our inflation rate to rise with the recent hike in petrol prices?
A: Definitely. At least 16 per cent of a household expenditure is on transport and that was heavily subsidised before.
But now, with the revised subsidy system, we expect a higher inflation rate.
Bank Negara has estimated that the rate would go up by 5.3 per cent.
In Thailand it is up by 7.6 per cent, in Indonesia by 10.3 per cent and Vietnam 25.2 per cent.
Q: Are there any plans to improve the HES?
A: Yes there are, in terms of methodology and coverage.
Redundant items will be removed and new items in the market place will be included in the basket, for example, that of broadband services.
We will also try to cover more households and include a wider spectrum of representation of Malaysian consumers.
On methodology, we are looking at the systems in Canada and Australia and looking at how we can use the latest technology to make the survey process more efficient.
Inflation rate: The numbers just simply do not add up!
By : SONIA RAMACHANDRAN and AUDREY VIJAINDREN
WITH a bachelor's degree in economics and political science from New York University in 1973, and a master's in economics from Illinois University a year later, Ismail's accomplishments are no mean feats. More so since the senator is visually impaired.
Q: Why do you say the calculation of the inflation rate is wrong?
A: When you talk to many housewives, who are the ones responsible for the household budget and who go to the market, they will tell you that the increase in prices has gone way beyond what the government claims to be the rate of inflation.
Similarly, when you talk to those who buy durable goods like washing machines and other electronic goods, they too are facing the same situation.
Prices are no longer the same as in the past. This is due to the input going into the cost of production like transportation, oil and electricity tariffs, which have all increased.
You also see increases in medical services and also in education.
How can all this not be reflected properly?
Last year's rate of inflation increased by two per cent over that of 2006. This was such a small increase. But in the market, the prices of chicken, rice, cooking oil and flour are all soaring.
Therefore, there must be something wrong in the calculation of inflation.
Q: Why do you think this is so?
A: Some say one explanation is that some of the items within the basket of commodities remain stable because of price controls. So what rises is the price of only some of the items and thus, when the average is taken, the figure is low. But I think that explanation is incorrect.
Q: How so?
A: There are two reasons for this incorrect calculation of inflation. One is that the weight given to items in the composition of the basket no longer reflects the true household expenditure of that product.
For example, let's say the overall weight for food is 50 per cent, but in the composition of the basket, the weight allocated for food may only be about 30 per cent.
The second reason is that the quality of the products in the basket may no longer be the same.
For instance, you may have been taking the price of fish and all this while it may have been that of the kembong fish. But as the quality of life increases, so does people's taste, and they may go for a costlier variety of fish.
That could be another reason why it does not possibly reflect the inflation rate.
Q: What do you suggest be done to rectify the situation?
A: The Statistics Department should conduct a thorough study of this again, especially the weights and quality of goods in the basket.
This study is important so that people will not have a cynical view of the inflation rates released by the government.
Singapore's inflation rate is 6.7 per cent. Thailand's is 5.3 per cent. How come Malaysia's is only two per cent?
The inflation rate in all the countries is increasing and it's as though Malaysia is isolated from everything.
Q: Why is a correct inflation rate important?
A: A true picture of the inflation rate is very important because you use the inflation rate to measure the persistent increase in price levels.
If there is a persistent increase, it will tell us whether or not our standard of living is being undermined by the rate of inflation.
If the inflation rate is not correct, the growth rate figures released by the government will also be incorrect.
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