May CPI Disappoints (Me)

It’s a topsy-turvy world when an increase in the general price level is cause for celebration, yet that is the stage Malaysia (and the rest of the world) is in now. For nearly forty years, the primary thrust of macro-management has been taming the beast of inflation as the foundation for sustainable growth. Inflation causes many ills, not least of which is devaluing incomes and causing hardship for the poor and the old. But this global recession is unlike any other, with the threat of a deflationary spiral into full-scale depression always present, like a bad party guest who just won’t go away.

For that reason, I wish I could take comfort from the rise in May CPI, but unfortunately I can’t. Disinflation on an annual basis is still ongoing as expected (log annual changes; 2005=100):



But the level of the CPI itself has ticked up:



The source of the rise is what’s causing my discomfort: housing and utilities. While there’s a huge element of subsidy in utilities, I suspect that some pass through of higher energy prices is happening, in which case the rise in the CPI is supply driven rather than demand driven. That means it isn’t caused by the looked-for recovery in consumption that would signal a turnaround in economic activity.

I can’t confirm that of course and it could possibly be due to housing instead, which was potentially boosted as a result of refinancing activities prompted by lower interest rates (the housing component is approximated by rent and imputed rent, the latter of which should be proportional to house prices). That would be better from an economic standpoint, as it implies demand-driven inflation rather than supply-side.

So the search for “green shoots” goes on.