As of late the most talk about topic is the recent fuel hike and people are getting mad at our Government for not keeping up with its promises. To add fuel to fire our Domestic Trade, Cooperative and Consumer Minister Hassan Malek said that the recent fuel hike of 20 cents for Ron 95 is not an issue at all. He claimed that it will only result to an increase of 0.1% in food prices. Anyhow, I am sympathy towards this bloke because he got walloped for the wrong reason. He was accused in numerous blogs for misleading the public by providing fraudulent information and ‘talking rubbish’.
To me, I reckon he is 100% correct and we had to thank him for being a whistle blower. Why? Well, before we hits back at him for ‘talking rubbish’ I reckon we should calm down and do some analysis on what he claimed. I hope after finish reading this article you should learn not only what he said is correct and but also how our Government manipulates the inflation rate. To begin with, I present to you below the method on how our Statistic Department calculate the CPI or Consumer Price Index, what items constitutes it and how to decipher it.
The Consumer Price Index measures the movement of goods and services purchased for consumption over a period of time. It is a very good measure for households to evaluate their financial position and purchasing power over time. As far as we know, prices of goods and services has went up much for the past couple of years and yet the government had been telling us the contrary. As for the latest round of fuel hike which was announced last week, we have yet to feel the inflationary effect because it has not worked its way into the economy as yet or what is called the ‘lag effect’. The Transportation Association has already made its intention clear by announcing the increase of transport charges by 15% soon. When that happens, then only will we start feeling the lagged effect of inflation. Below I present to you the process on how our Government calculates our CPI and also how they manipulate the figures to keep our inflation rate down. This is a very lengthy and statistically boring article (about 21 pages).
Why CPI figure matters?
CPI figure has always been important to Government policy makers. Since the CPI is a measure of the price level of goods and services, it will help provide a good picture on the ‘temperature’ of the economy. Policy makers will need to know the condition of our economy, whether it is over heated, under perform or just right? If the economy is over-heated then policy makers will have to tighten up the money supply through Monetary Policy to slow it down and vice-versa. Next we will look into the process on the CPI is calculated.
How to Calculate the CPI?
So how do we measure the Index? This can be complicated because literally there are thousands if not millions of goods and services out there. If we were to include every one of them in our calculation then it will be quite impossible to compute the Consumer Price Index.
One way is to classify them ‘into a basket’ that will represent the majority of the products and services. To illustrate on how the Consumer Price Index is derived, I present you the following fictional economy and its assumptions.
- Only five products – Milk, Sugar, Flour, Honey and Salt
- It is a closed economy and new products are not added in
- Period of study is 3 years
- Total consumption is 1 unit per year (be it in kg or liter) for all products to simplify our illustration.
- Since there are only 5 products there will be no grouping under Food or Energy and etc.
Prices
| |||||||
Year
|
Milk
|
Sugar
|
Flour
|
Fuel (lt)
|
Chicken
|
Total
|
Price Index
|
2000
|
3
|
1
|
1.5
|
2.5
|
4
|
12
|
(12/12)x100 = 100
|
2001
|
3.3
|
1.2
|
1.8
|
2.7
|
4.2
|
13.2
|
(13.2/12)x100 = 110
|
2002
|
3.8
|
1.6
|
2.2
|
3.6
|
5
|
16.2
|
(16.2/12)x100 = 135
|
Legend:
- The Total column is the total of all five products. For example in year 2000 the Total price or Cost of Basket is 12.
- To calculate the Price Index you must have a base year which is Year 2000 with the Price index of 100.
- The inflation rate can be derived by the following formula.
Price increase = Cost of Basket current year/Cost of Basket Base Year x 100. The price difference in Year 2001 can be calculated as (13.2/12) x 100 = 110 or 10%. Similarly in 2002 the price difference is (16.2/12) x 100 = 35 or 35%. Thus, prices have increased 35% from 2000 to 2002.
Malaysia’s CPI classification
Malaysia’s CPI report is divided into 12 groupings which consist of about 460 itemized goods and services. The following is the CPI table as released by the Department of Statistics Malaysia with the weights assigned to each of the 12 groups. The year 2010 is the base year and hence the value is set equal to 0 as per our example above. The full report can be read from this link.
Table 1 : CONSUMER PRICE INDEX FOR MAIN GROUPS, MALAYSIA (2010=100)
Group
|
Wt.
|
Index
|
% Change
| |||
Jan
2011 |
Dec
2011 |
Jan
2012 |
Jan 2012 /
Dec 2011 |
Jan 2012 /
Jan 2011 | ||
TOTAL
|
100.0
|
101.8
|
104.2
|
104.5
|
0.3
|
2.7
|
Food & Non-Alcoholic Beverages
|
30.3
|
102.6
|
106.6
|
107.5
|
0.8
|
4.8
|
Alcoholic Beverages & Tobacco
|
2.2
|
104.6
|
104.6
|
104.6
|
0.0
|
0.0
|
Clothing and Footwear
|
3.4
|
99.9
|
99.6
|
99.4
|
-0.2
|
-0.5
|
Housing, Water, Electricity, Gas & Other Fuels
|
22.6
|
100.8
|
102.5
|
102.6
|
0.1
|
1.8
|
Furnishings, Household Equip. & Routine Household Maintenance
|
4.1
|
101.0
|
102.5
|
102.9
|
0.4
|
1.9
|
Health
|
1.3
|
101.5
|
103.6
|
103.9
|
0.3
|
2.4
|
Transport
|
14.9
|
103.2
|
104.9
|
104.9
|
0.0
|
1.6
|
Communication
|
5.7
|
100.0
|
99.4
|
99.4
|
0.0
|
-0.6
|
Recreation Services & Culture
|
4.6
|
99.7
|
103.1
|
103.2
|
0.1
|
3.5
|
Education
|
1.4
|
101.0
|
103.2
|
104.1
|
0.9
|
3.1
|
Restaurants and Hotels
|
3.2
|
103.2
|
107.5
|
107.8
|
0.3
|
4.5
|
Miscellaneous Goods & Services
|
6.3
|
101.1
|
103.9
|
103.8
|
-0.1
|
2.7
|
Non-Food
|
69.7
|
101.5
|
103.2
|
103.2
|
0.0
|
1.7
|
Durable Goods
|
6.5
|
100.2
|
101.2
|
100.8
|
-0.4
|
0.6
|
Semi-Durable Goods
|
4.4
|
100.2
|
100.3
|
100.2
|
-0.1
|
0.0
|
Non-Durable Goods
|
41.6
|
102.9
|
105.5
|
106.1
|
0.6
|
3.1
|
Services
|
47.5
|
101.2
|
103.8
|
104.1
|
0.3
|
2.9
|
Or can be shown graphically with the following Pie Chart.
Based on the above and the weights assigned to the main groups, the overall price increase is recorded at 2.7 % which can be shown by the following.
Year
|
Price Index
|
Difference
|
January 2010
|
100
|
0
|
January 2011
|
101.8
|
1.8
|
January 2012
|
104.5
|
4.5
|
From above the price increase from
Jan 2010 – Jan 2011 is 1.8%
Jan 2010 – Jan 2012 is 4.5%
Jan 2011 to Jan 2012 is 2.7% (4.5 - 1.8).
So does the inflationary figure (2.7%) represent the actual price increase of all the 460 items in the market place? Or could it be higher if not due to the Government’s manipulation of data, wrongly classification of groups and misleading weights assigned to the different groups?
What are the flaws in our CPI?
- Food accounted for too much weighting in the CPI
Based on the above Table, the Food and Non Alcoholic grouping accounted for 30.3% of the total CPI weighting. This can be quite considerable when we compare it with the rest of the world. The following chart is the for the food component as a percentage of the CPI for 25 countries around the world.
As you can see from the chart above when you take out the countries at the head and tail end of the spectrum (India – 47.1% and US 7.8%) then the statistical bias will be reduced and it will provide a more accurate picture. After the adjustment the mean for Food Component of CPI in the 23 countries is about 17.3%. So Malaysia’s 30.3% food weighting in the CPI can be considered on the high end of the table after China’s 31.4%. The question is whether our 30.3% of the food component actually reflect the price rise in the CPI.
From Malaysia’s CPI table above the price difference in the food component from Jan 2011 to Jan 2012 only recorded a mere 4.8% increase. But according to FAO (Food And Agriculture) Organization of the United Nations, the price of basic food necessities around the world have increased by 28% for the past year. So can we conclude that is it due to Malaysia’s ability to manage its food production much better than the rest of the world or the FAO’s figure is inaccurate? Let’s take a look at the table below.
Main Group and Sub-Group
|
Weightage
|
Jan 11 - Jan 12 % Change
|
01. Food and Non-Alcoholic Beverages
|
30.3
|
4.8
|
001. Food away from home
|
10.04
|
5.1
|
011. Rice, Bread and other cereals
|
4.39
|
1.5
|
012. Meat
|
2.94
|
5.4
|
013. Fish and Seafood
|
4.5
|
10
|
014. Milk and Eggs
|
1.77
|
6.2
|
015. Oil and Fats
|
0.58
|
1
|
016. Fruits
|
1.2
|
2.1
|
017. Vegetables
|
2.14
|
-0.6
|
018. Sugar, Jam, Honey
|
0.59
|
5
|
019. Food Products
|
0.81
|
7.5
|
010. Coffee,Tea, Cocao Beverages
|
1.37
|
3.2
|
The above Table is the breakdown of individual items that comprise the Food and Non-Alcohol Beverages Grouping. Can anyone tell me what are the difference between the ‘food away from home’ and ‘Restaurants and Hotels’ in the main grouping Table earlier? And why assign such a big weighting (30.3%) onto it?
For anyone who has been to the wet market recently will tell you that as compared to last year, prices of vegetables increased by more than 30%, seafood above 30%, fruits above 20%, milk and eggs certainly increased much more than 6.2%. Is it true that we have a reduction in prices of vegetables as indicated above -0.6% or only 5% increase for meat?
Since sugar is one of the more important food items because of it’s usage in almost all Food and Beverages, it is certainly flawed to assign a weight of only 0.59% together with Jam and Honey. As we know the price of sugar had increased by almost 100% since our Maverick businessman Syed Mokhtar took over the business from Robert Kuok a few years back. Since sugar is used in most F&B, the ‘trickle down effect’ is certainly very great. Whenever there is an increase in the price of sugar, restaurants and food operators also took advantage by increasing their food prices. This resulted in a ‘pass on inflationary’ effect on prices of other things even though there have no direct relation to sugar.
So what we can deduce from here is that the different weight assigned to the Food Grouping in the CPI classification is biased. More than 30% of the weighting on the Food Grouping comes from ‘Food away from Home’ which nobody seems to understand the nature of it. Fish, meat and vegetables are under represented because they only accounted for less than 10% of the total since they make up most of our daily expenses. It should account for higher than 10% if it were to reflect a more accurate representation of consumer expenses on food.
- Bias weighting in Housing,Water,Electricity,Gas and other Fuels.
The second grouping that is in dispute that we would like to discuss is the Housing,Water,Electricity,Gas and other Fuels. Before we go on let’s take a look at the items that consist the Housing grouping.
Main Group and Sub-Group
|
Weightage
|
Jan 11 - Jan 12 % Change
|
04. Housing,Water,Electricity,Gas & Others
|
22.59
|
1.8
|
041. Actual Rental for Housing
|
17.24
|
1.8
|
043. Maintenance and repair of Dwelling
|
0.67
|
1.7
|
044. Water Supply & Misc services
|
1.34
|
0.5
|
045. Electricity, Gas and Other Fuels
|
3.34
|
1.7
|
Source : Department of Statistics, Malaysia
The above are the items that represents the Housing,Water,Electricity and Gas Grouping. If we do not look into the breakdown of the Grouping then it might be justify to assign such a big weighting since it is also known as ‘Energy Grouping’. However as you can see most of the weighting goes to ‘Rental for Housing’ which was allocated a lion share of 17.24% out of the 22.59% or 76%. Electricity, Gas and other Fuels only take up 3.34% while the Water Supply share is 1.34%. Heck, since when rental is more important than Electricity, Gas and Fuel in our daily expenses?
By putting less importance to Electricity and Gas and Other Fuels in the ‘Energy Grouping’ any price increase by the Government in Fuel and Electricity ‘will only have minimal impact’ on the overall grouping and hence the calculation of the CPI figure. Even with the rising of energy prices, it will have a less profound effect on the CPI because Electricity, Gas and other Fuel because it represents only 3.34% of our Consumer Price Index.
- Health Group weighting is too low.
Health expenses only accounted for 1.3% in the weightage of the CPI? The average income of a Malaysian household is about RM 14,016 per annum according to the Household Income Survey done in 2009. So based on the above statistics the average Malaysian household can only spend about RM 182 per annum (1.3% x RM14,016) on health expenses. Does this seem logical since health care cost has been ever rising for the past years? Again let us look into the details on the Health Grouping below.
Main Group and Sub-Group
|
Weightage
|
Jan 11 - Jan 12 % Change
|
06. Health
|
1.32
|
2.4
|
061. Medical products, Appliances & Equip
|
0.83
|
2.3
|
062. Out Patient Services
|
0.31
|
3.1
|
063. Hospital Services/In Patient
|
0.18
|
1.4
|
Source : Department of Statistics, Malaysia
Is it justifiable to agree to the Department of Statistics that we spend only about RM182 per annum (yes, not per month) on medical expenses? As we know a visit to a private doctor (General Practitioner) will cost at least RM35 and was up from RM25 in 2009.
Another thing that is not mention is the ‘Medical Insurance’ expenses in the above Grouping. A look at the whole CPI classification also failed to mention medical insurance except in Misc Goods and Services in Grouping 12 where it mentioned life insurance (weigh 0.44%) and insurance connected to accident and health (0.14%). How can life insurance have more weight than health insurance when we spend much more on health than life insurance on our income? The big problem in under weighting the Health Grouping is because health care is the ‘biggest and most consistent’ source of inflation over the years.
- Education – Flawed in weightings.
As for Education, it only accounted for 1.41% of the total. We believe that education in grossly under represented as the cost of education had going up in double digits especially in the tertiary level. The following is the breakdown of the Education grouping.
Main Group and Sub-Group
|
Weightage
|
Jan 11 - Jan 12 % Change
|
10. Education
|
1.41
|
3.1
|
101. Pre Primary and Primary
|
0.61
|
4
|
102. Secondary Education
|
0.38
|
2.4
|
103. Post Secondary non-tertiary
|
0.12
|
4.8
|
104. Tertiary Education
|
0.14
|
0.3
|
As can be seen from the above, the weights given to the different sub groups are clearly flawed. As a starter Education as a Main Group accounts for only 1.41% of the total CPI weights. Secondly Pre-Primary and Primary education seems to be given more weights than Secondary, Post Secondary and Tertiary education. Since when the Kindergarten and Primary Education are more important and take up more expenses than the secondary and tertiary education? Moreover tertiary education seems to have the least weights which indicates that it is less important and hence makes up the least on expenses in education. By right it should be exactly the opposite with most weights given to tertiary education with the rest on the descending order. Damn lies, since when studying in Kindergarten cost more than studying in Universities? If it is the case then parents need not be bogged down with PTPTN loans. Why our graduates need to be burdened with tens if not hundreds of thousands of dollars in loans when they graduate?
- Restaurants and Hotels.
The Restaurant and Hotel Grouping seems to be confusing. What is the difference with the Restaurant and cafes expenditure over here and ‘food away from home’ in the Food Grouping? Anyway below is the breakdown of the grouping.
Main Group and Sub-Group
|
Weightage
|
Jan 11 - Jan 12 % Change
|
11. Restaurant & Hotels
|
3.2
|
4.5
|
111. Expenditure in Restaurants & Cafes
|
2.95
|
4.8
|
112. Accomodation Services
|
0.25
|
2
|
Since our expenditure in Restaurants and Cafes take up quite a big chunk of our income when we eat out (unless you stay at home and cook), we feel that the weight that is assigned to Expenditure in Restaurants and Cafes is too low. As we all know eating out has always been getting more expensive these days. We feel that a higher weighting should be assign to this grouping (something like 8-10%) to reflect the changes in our lifestyles nowadays where people prefer to eat out than to cook at home.
- Transport.
The next grouping that we are going to examine is Transport. The following is the table for the Main and sub-grouping of Transport.
Main Group and Sub-Group
|
Weightage
|
Jan 11 - Jan 12 % Change
|
07. Transport
|
14.92
|
1.6
|
071. Purchase of Vehicle
|
2.9
|
-0.4
|
0711. Motocars
|
2.55
|
-0.4
|
0712. Motorcycles
|
3.2
|
-0.3
|
0713. Bicycles
|
0.03
|
0.6
|
072. Operation of Personal Transport Equip
|
11.08
|
2.3
|
0721. Spare parts
|
0.37
|
6.2
|
0722. Fuels & Lubricants
|
8.77
|
1.9
|
0723. Repairs and Maintenance
|
1.36
|
3.6
|
0724. Other Services
|
0.58
|
1.1
|
073. Transport Services
|
0.94
|
1.5
|
0731. By Railway
|
0.03
|
0
|
0732. By Road
|
0.69
|
1.8
|
0733. By Air
|
0.11
|
1.4
|
0734. By Waterway
|
0.07
|
0.2
|
0735. Other Transport
|
0.04
|
1.6
|
In transport under the sub-grouping of 071 do take notice on the column for the purchase of motorcars (0711). It is given a weighting of only 2.55 which we understood is well under represented. In actuality, monthly payments for vehicle hire purchase constitute more than 15% of the average household disposable income.
To illustrate further, we use the Perodua Myvi (a rebranding from Daihatsu) as our base calculation on monthly hire purchase payment since it is the best selling car among Malaysians. To illustrate we take the low end version of the Myvi cost about RM44,000 and with the average household income of Malaysian at RM 14,016 (RM 1,168 per month). For a loan of 90% (RM 41,400) with a repayment period of 9 years, consumers will have to fork out about RM466 per month for the hire purchase payments. Heck, since the monthly loan repayment take out about 40% (466/1168) of the disposable income, why is it only assigned a weighting of only 2.55? Moreover it also recorded a price drop of -0.4%.
Fuel and Lubricants only consist of 8.77% out of the 14.92% in Transport. We feel that the middle and lower class spend much more than 8.77% of their income on both of them.
In Summary
The above are some methods that the government used to manipulate to CPI data so as to under report the actual inflation rate. The following are other fundamentally flawed methods that the government use to suppress the CPI value and hence the inflation rate.
- The Chain weighting system.
What is chained CPI? Chained CPI is actually the grouping of a few years CPI figures and averages them up. The end result will be the reduction in the CPI figure because instead of using the traditional basket of goods as a base for calculation the chained CPI. Say for example the inflation rate for 2008 is 5%, 2009 is 6% and 2010 is 7%, so by chaining them together will give us an average figure of 6% for the 3 years. The end result will be the under reporting of the CPI index by up to 30%.
- Neglect to take into consideration of substitutes. Due to the price increase, consumers will ways to adjust their lifestyles by substituting lower quality products for higher quality ones. For example when the price of imported beef form Australia increased by 20% then cost conscious consumers will automatically switch to cheaper substitutes which may be the Local beef or imported Indian Beef which command a lower price. As a result of the increased demand for cheaper substitutes, it will also cause a price increase. However we afraid that such increase in price is not recorded in the CPI calculation because the breakdown in Meat in the Food grouping only consist of fresh, frozen or processed meat.
Main Group and Sub-Group
|
Weightage
|
Jan 11 - Jan 12 % Change
|
01. Food and Non-Alcoholic Beverages
|
30.3
|
4.8
|
001. Food away from home
|
10.04
|
5.1
|
011. Rice, Bread and other cereals
|
4.39
|
1.5
|
012. Meat
|
2.94
|
5.4
|
0121. Fresh Meat
|
2.28
|
5.3
|
0122. Frozen Meat
|
0.3
|
7.2
|
0123. Processed Meat
|
0.36
|
5.2
|
Since Meat is broken down into Fresh, Frozen or Processed then any increased in the price of substitutes might not be included into the CPI calculation. Furthermore not all prices move in the same amount and direction which further complicates the calculation for the CPI. The Meat sub-grouping can be further breakdown into Beef, Chicken, Lamb, Pork and etc. For all you know, the price of Chicken may move up faster during the certain time of the year or during festivals or because there is a short supply of chicken due to the foot and mouth disease. Similarly the price of beef might go down because one of the importers had ordered a big consignment from India and hence create an over supply situation.
- The basket of goods consists of too few items. In America, the basket of goods from the Bureau of Labor Statistics (BLS) consists of more than 80,000 items. In Malaysia under the Department of Statistics their basket of goods only consist of about 460 items which we believe is very under represented and that is why on most sub-grouping like meat, fish, fruits and etc there are no further breakdown. By not increasing the number of goods and services in the basket, it can manipulate the CPI rate more easily because the movement and price changes of many items can be under reported or better still be ignored.
Any solutions to counter higher inflation?
The Government can claim that there is a low inflation rate of 2-3% because we as the consumers are adjusting our lifestyles. Instead of eating out 4-5 times a week, now we can only afford to eat out only once or twice a week due to increasing cost. Not only prices has increased the serving sizes are also reduced. Even the Subway Sandwich is not spared after being caught with serving customers with 11 inch ‘footlong’ sandwiches. Hence when we cook more at home and eat out less, the government can claim that the overall food costs have decreased.
So in the end we can conclude that it is the Government that is controlling and manipulating the CPI figure so as to under reporting the inflation rate. Since the calculation of the CPI is based on the basket of goods that reflects the patterns of consumer spending hence its movement is also subjected to Supply and Demand economics. So how can we go about reducing prices?
Increase Supply
One way to help reduce prices is to increase the supply of the goods and services that is experiencing a price hike. For example, to reduce the ever increasing health cost, the government can build more hospitals, clinics and also engage more doctors. We have ‘1Malaysia Clinic’ which charges only RM1 per visit but what is the point when you can hardly find any doctors attending to them most of the time.
Similarly to address the problem of the increasing cost in education, the government can either build more schools and universities or provide subsidized or 0% loans to students. Since future economic growth varies directly to today’s investment in human capital, more emphasis should be given to education.
Take China for an example, for the past decade China had been investing heavily in the education sector. Their authorities have been investing a few hundred billion dollars annually into the education sector and this represents more than 1.5% of GDP. Since the last decade the amount of higher education institutions had more than doubled from 1022 to 2263. Under Project 211 initiated during 1995 about 100 Universities are selected for the program where special funding will be allocated. The main aim is to raise the Research Standards of the Universities and also at the same time cultivate social economic developments. You will be surprised that studying in China is cheaper than in Kuala Lumpur. Due to the economies of scale in education, the tuition fees at China’s top Universities come to less than US$4000 per annum.
According to the President of Yale University Professor Richard Levin, in 25 years time Chinese Universities would rank in the world’s top 10 Universities with Tsinghua (49 at the moment), Beijing and Fudan Universities leading the way. He also added that by then Chinese Universities will rival those from the Ivy League and Oxbridge universities. Over here things are going exactly the opposite where the rankings of the local universities kept falling due to its ineffective education policies and also its choice of teaching staffs that favors certain ethnicity.
According to the latest QS World University rankings, only University Malaya is in the top 200 this year while Singapore’s National University moved up to ranked 24 in the world. On top of this UM’s ranking also dropped from 156 to 167 this year. Only seven Malaysian Universities made it to the QS’s top 800 list. Of the seven only UTM manage to improve its ranking from 358 to 355 since 2012. So this is how dilapidated the condition of our education system.
Issue more Permits
For essential items like rice and sugar, the government can help reduce their prices by issuing more import permits to more companies instead of relying on one or two companies that holds the monopoly on import permits. In Malaysia the rice and sugar trade is controlled by political crony Syed Mokhtar. Additionally the government can award more TOL (temporary permits) to farmers to farm idled or unused land so that the national food bill can be reduced since food consist of more than 30% in the CPI weighting.
Remove Trade Barriers
Another way to reduce the cost of living is to get rid of trade barriers and reduce import taxes on vehicles. Due to its protectionism policy and the government’s intent to protect its local car venture (Proton) which again being acquired by our Umno crony, it imposed hefty import taxes (more than 100%) on imported cars. As a result it put a heavy burden on its people by having to pay expensive hire purchase payments. Since the National car industry is bleeding red ink year after year it will be a futile attempt to keep it as a going concern. It is not the time for national pride. It will be a better policy to scrape the project completely and at the same time reduce the import taxes on imported cars. By reducing the price of imported cars it will lessen the burden of the people by paying less hire purchase payments and hence more money available to spend on other things.
Wrapping Up
The statistics provided by the Department of Statistics does have many questionable and controversial weighting in their formulas and hence does not provide a true picture of the actual inflation rate. Even in the United States their actual CPI calculation is masked with the ‘’HEDONISTIC’ entry. The Hedonistic pricing method is used to lower down the CPI rate by altering the prices of goods and services. For example luxury cars are priced without their luxury accessories like air-con and stereo sets.
If not due to the manipulation of the CPI value through biased weighting and grouping, our inflation rate would have been much higher than the reported 2.7%. If they could have reclassified the groupings and weightings then i believed the actual inflation rate could be as high as 8%-10% which is three times the current rate. We believe that a better and unbiased model to calculate the CPI would be the one that can include as many goods and services as possible.
Recently, our Domestic Trade, Cooperative and Consumer Minister Hassan Malek said that the recent fuel hike of 20 cents for Ron 95 will only result to an increase of 0.1% in food prices has caused an uproar. I for sure reckons what he said was TRUE. This is because he was using statistics based on what we called ‘Confusing Numbers’.
To illustrate what it means, I present to you an example on how numbers can be manipulated with the concept of an average. An average or Mean is calculated by totalling up the scores and divided by the number of cases. Imagine a factory with the following workers and their pay.
So from the above can we conclude that the average or mean salary for the factory is $103,200 ($10,320,000 / 100)? NO, it’s ABSOLUTELY Wrong. As from the above the total salary is boosted because of the ten employees. Their salaries totalled up to $6,720,000 or $672,000 per person whereas the other 90 workers earned $40,000 each. To solve the problem we use the Median instead of the Mean. Using Median requires us to take the 50th and 51st (or halfway of 100) figure which is $40,000. So by using the Median approach instead of the Mean, it gives a better representation of the average income of the factory.
So, in our case when our Minister said that the fuel hike is not an issue, he might be referring to the top 5% income earners and not the lower and middle income group. As indicated by our example above, Hassan Malek could have taken the MEAN and not the MEDIAN income into consideration in his evaluation. In this case, a 20 cents fuel hike is chicken feet to those high income earners and thus can be translated to less that 0.1% price increase in their food expenses. But for the low and middle income earners this will represent a burden to them as the percentage of their income spent on fuel and lubricant is indeed much higher than the 8.77% as indicated by our CPI basket of goods. And when it is translated to food price increase it will be certainly much more than 0.1% later when the chain reaction begins. This led us to ask what other recording system that will help narrow down the fraud and irregularities committed by Governments in reporting the CPI?
One good model would be the Billion Prices Project (BPP) developed at MIT by Professors Rigobon and Cavallo. This model tracks more than 1 million goods and services both online and offline. Data are collected daily from online retailers by using computer software to scan through the web for updated retail prices and store in a database. The result will be an array of products that are sold by online retailers and is included ‘in a basket of goods’ which could be used to calculate the real time, daily, weekly, monthly and yearly CPI figures. In other words it can provide high frequency inflation data across countries and sectors. So by tracking millions of product and services in real time it represents better distributed weightings and an unbiased view of the CPI.
Samcheekong.blogspot.com
References
Roger LeRoy, 2005. The Economics of Public Issues, Pearson Addison
Martin Prachowny, 1994. The Goals of Macroeconomic Policy, Mackays
Olneck M. (1993). Productivity and Education. University of Wisconsin Press
Richard K. Lester. 1998. The productive Edge – A new strategy for Economic Growth. Norton & Co.
Richard H.K Victor. 2005. Globalization and Growth – Case studies in National Economic Strategies. Harvard Business School.
Derrick Niederman and David Boyum, 2003. What the Numbers say. Broadway Books
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