August 2011 CPI: Core Acceleration

Yesterday’s release of the August CPI numbers was a mixed bag – on the one hand, in the biggest weighted items of food and transport cost increases went almost flat, but on the other, many other expenditure items went up in price (log annual and monthly changes; 2000=100):

Core inflation (ex-food, ex-transport) rose steeply on both annual and monthly growth measures, driven largely by increases in the prices of rent and utilities, miscellaneous items, and recreational and cultural activities. To a lesser extent healthcare costs rose as well. The Pain Index which covers food and petrol costs, flattened in August.

Apart from the increase in the cost of housing, these other increases in the price level (add to the list education) will be I think a recurring feature of Malaysia’s inflation experience over the next decade. As the economy slowly transforms into a more service sector led economy, labour costs will take increasing prominence, driving up prices in areas with a high (skilled and semi-skilled) labour input such as education and health, and to a lesser extent tourism and hospitality.

I would take this as a positive sign if it in fact happens, because it means that labour incomes are actually rising as we hope. Already the fastest pace of price level increases since the rebasing of the CPI in 2010 isn’t in food or petrol – it’s in restaurants and hotels. Eat out at your peril.

Technical Notes:

August 2011 Consumer Price Index report from the Department of Statistics