Thursday, January 21, 2010

Dec 2009 Consumer Prices

Inflation has remained benign over the past year. DOS reports that consumer prices only rose 0.6% for the whole of 2009, but that mild figure hides a lot of movement underneath. For instance, the food and non-alcoholic beverages index rose 4.1%, but transport costs dropped 9.4%. And of course, 2008's inflation rate of 5.3% was the highest since the CPI rose 5.5% in 1982, so there's a base effect from the wild ride in fuel prices in 2008.

Minus that aberration, the CPI has been on a fairly steady and consistent uptrend (with little change in slope) since 2003 (index levels, 2000=100):

You can see this pattern in the growth (i.e. CPI inflation) figures as well:

Note that month-on-month growth is rarely above 0.3%, and only twice above 1% in the last ten years. The core inflation story is even steadier - at least using my pseudo-core measure (dropping food and trasnport indexes):

Core monthly inflation averages out at about 0.1%, so most of the upward pressure on inflation is coming from food and transport costs. Even then there are some counterbalances, such as clothing and communication prices, which have consistently been going down over at least the last five years:

So this coming year, sans another zoom up in oil prices, inflation is probably going to stay quiet, even with the new petrol subsidy scheme coming into effect in the middle of the year and even as BNM keeps interest rates low.

The proximate problem that BNM has to deal with vis-a-vis inflation is really structural. Consider the continuous drop in clothing prices, which is primarily a result of the shift of textile manufacturers to low-cost production bases in places like Indonesia and Vietnam (and yes, China). Part of the problem facing many monetary authorities this decade is that with the almost sudden emergence of these low-cost exporting economies in the late 1990s, global goods prices have held steady or dropped which obviously colours consumer decisions on spending. Yet the increase in consumption did not result in inflationary pressures (at least until 2007-2008), or upward pressure on wages or interest rates. Hence central banks stood by, despite a consumption boom and bubbles in many asset markets.

How we deal with this issue in the future is still being debated, though I suspect that eventually the problem will solve itself over the next decade as labour costs continue to rise in the exporting economies.

Technical Notes:
1. Consumer Price Index report from DOS.
2. Want to know how to get quarterly or annual index numbers from the monthly numbers? Simple...just average out the monthly indexes for the period in question. For instance, the Q1 2009 CPI number is just the average of January-March 2009 monthly index readings. The 2009 CPI is gotten by averaging the monthly index numbers from January to December 2009.


  1. Dear HishamH,

    I dont know but measuring inflation based on goods with a controlled price kind of sounds artificial ini't?

    Would appreciate your thoughts?


    Wenger J Khairy

  2. IIRC all the controlled items are either under the F&B category, or under transport (petrol), The only exception I think is natural gas sold to consumers, but that has a very small weighting. All other controlled items (e.g. cement, steel) are captured under the PPI.

    All of which makes watching CPI ex-food, ex-transport (the measure used here as core inflation) more interesting.

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