An Alternate Measure of Inflation

The US likes to go its own way on many things, from using the imperial system of measurement (feet, pounds, miles) to American Football. In monetary policy, the Federal Reserve - which itself is an awkward conglomeration of 12 privately owned regional banks rather than a properly constituted central bank - uses Core PCE inflation as its primary policy target, unlike virtually every other central bank in the world, which use the Consumer Price Index. Since I was playing around with the GDP data, I'd thought I'd might as well do a comparison for Malaysia. It turns out there's not a whole lot of difference, but what differences there are, are really interesting.

First some theory, and why differences exist between these two measures. The CPI is fixed basket of goods and services, where the choice of components is determined by a household expenditure survey at some reference period. Holding the basket constant allows for clear measurement of changes in costs, and the basket is periodically revised to take into account changes in consumption. The PCE price index isn't a fixed basket, and components are effectively whatever people happen to be spending on right now.

The plus point is that this takes into account substitution effects, as people will switch away from goods or services where prices have increased to lower cost alternatives. This is especially important when there are large swings in prices (either up or down), as the CPI would tend to ignore such changes and thus overstate or understate actual inflation. On the debit side, this difference really muddies the water when trying to measure changes in living standards, as substitution does not imply there are no changes in quality.

4Q 2021 GDP: The Good, The Bad, and The Ugly

It's taken me this long to really delve into last week's GDP report, largely because I wanted to try something different (results forthcoming). But before getting into that, the headline numbers themselves are mostly encouraging (log annual and quarterly SAAR changes):

The Drivers of Inflation

What is driving inflation in Malaysia? For the last four months of 2021, the CPI jumped a full two points, or 1.6%, which is equivalent to an annualised increase of 5%. That would mark the strongest annual inflation reading since 2008, when the lifting of price controls on RON95 petrol saw it hitting RM2.70.

If you read yesterday's post, you'll suspect its food and petrol, and you would be mostly right. There is however some nuance here. To satisfy my curiosity, I cut the data based on different time periods, looking at the contribution of each COICOP category to total inflation:

The Contours of Inflation

This has been the hot button topic of the year, pretty much everywhere around the globe. Inflation has accelerated in many countries, but at very different rates. Regardless, there has been a general withdrawal from both fiscal and monetary stimulus across both developed and developing countries, though the results remain to be seen.

Before getting into any analysis, this is what inflation in Malaysia looks like (log annual and monthly changes; 2000=100):

For those coming across this for the first time, I generally track inflation via four different indices: the CPI and PPI from DOSM, a core measure that excludes food and transport, and a pain index that is only food and transport. I haven't talked much about the PPI in the past, but I'll include that in a future post because in this particular period, it's quite important. Also, my core measure is slightly different from the one compiled by DOSM, but they're pretty close.

The first and most important point from the chart above is that overall inflation in Malaysia is roughly back to its long term average. The second important point is that it is almost exclusively food and transport that is driving the increase in the price level. Core inflation has also been rising, but nowhere near to the same extent and its also been going up in fits and starts, not a steady continuous rise.

Here's looking at the three indices from a level perspective (2000=100):

Looking at the raw levels is always useful, especially when you get structural breaks in the data (like yes GST, no GST, or a sudden pandemic).

Note that core prices, ie everything but food and transport, has not seen anything like the increase in those prices. A second point is that the steepness of the line for core prices has been relatively flat for the last five years or so. Inflation (the rate of change of prices) is evaluated as the slope of the price index over time, so a flatter slope indicates weak price pressures. All that is rather telling, pointing to weakness in domestic demand generally, even with the slight uptick in the most recent data. The indications are that inflation is Malaysia is being driven by external prices, not domestic pressures.

In the queue after this, delving into national comparisons, theory, empirics, and MMT.

Technical Notes:

CPI data from DOSM

Unemployed and Out of Work

I wanted to start a discussion on inflation last night, but it took longer than I thought to compile the data (it's been a while). In the meantime, here's something that's a little unique to Malaysia.

Starting with the first MCO, DOSM began adding to their monthly employment report an estimate of the number of people who still had jobs, but for whatever reason were unable to work. It's a bit of a catch-all category, and includes those with pay as well as those without. Nevertheless, the numbers were initially staggering:

At the peak in April 2020, the number of people in this category numbered nearly 4.9 million, over and above the 778k unemployed. If you put the numbers together, about 36% of the labour force were out of work during the first weeks of the first MCO:

During the 2nd extended MCO last year, the combined rate rose up again to reach 9.8%. This mini bump alone exceeded the worst of the 1980s recession, and more than triple the rate seen during the Asian Financial Crisis in 1998. Thankfully, the latest data shows significant improvement, with unemployment dropping below 700k for the first time since March 2020, and the temporary category dropping to 112k.

May we never see anything like this again.

Silly Stagflation?

A reporter messaged me the other day. With inflation rising, there was apparently concern in "some quarters" that we could see deflation in 2022. My rather flippant reply was that this was silly, which of course, the next day he reported verbatim. While I regret the flippancy, I'll stand by the analysis.

Stagflation is an environment when you have simultaneously high inflation and high unemployment (implying an economy in recession), which makes a policy response a matter of damned if you do and damned if you don't. Bringing down inflation would slow the economy further, raising unemployment; trying to reduce unemployment would fuel faster inflation. This supposed relationship between inflation and unemployment is embodied by the Phillips curve, named after its inventor, AW Phillips. I won't get into the history of that right now, but suffice to say that its not quite that straightforward.

Reset and Reflections

A long long time ago in a galaxy far far away...I started this blog. It's been 13 years to the day that my first post went live. I never dreamed when I started that it would take me on such a strange wonderful journey, down paths I never dreamed of going down. Blogging has brought me professional success and recognition, and put me in touch with many talented and intelligent people that have enriched my thinking and my life. It's been at turns illuminating, exhilarating, exasperating and frightening. All this from just a desire to openly express my thoughts on that driest of subjects, economics.

Three years ago, I took a decision to step back. I'd reached a point where I thought I'd said all I wanted to say. I'd also just lost my father, I was working in a new role with significantly larger responsibilities, and I also started taking better care of myself, working out to keep fit. All this took a toll on my time and energy. It felt like it was time to let younger and fresher voices to take on the challenges of the present. I thought my time had passed.

But that itch to write has never left. Blogging was a daily part of my routine for over ten years, and lately that itch has started growing again. So time and responsibilities permitting, I'm going to start writing again.

The past two years of dealing with a pandemic has accelerated a growing trend towards reexamining and reassessing many of the cherished foundations of economics, both macro and micro. There has never been a more exciting time to be an economist in recent memory. What started off as a questioning of the orthodoxy during the GFC has morphed with Covid into a battle of ideas we have not seen since the heyday of Keynes and Hayek. I want to put in my 2 cents worth.

So, hello world. Again.