Malaysia's Statistics Department To Revise Consumer Price Index

Malaysia's Department of Statistics is planning to revise its Consumer Price Index (CPI) next year amid suggestions that it does not reflect the true cost of living. The Department is conducting a study on income patterns that will affect the composition of the underlying basket of items and their relative weights.

• While the widespread dynamic of strengthening, broadening price pressures has not been alien to Malaysia, headline inflation has stayed relatively low compared to emerging Asian peers (Fig. 1). This has been attributed to the nation's status as a net commodity exporter. Similar to the neighbouring Indonesia, windfall revenue from the global commodity rally allowed the Malaysian government to fund subsidies and keep the costs of living in check.

Source: MNI - Market News/Bloomberg

• Factors shielding Malaysia from offshore inflationary pressures have subsided, with the commodity rally running out of steam, as the BBG Commodity Index sits ~18% off its June peak, while palm oil futures (generic contract) have tumbled more than 50% from its March cyclical highs. Meanwhile, continued recovery in domestic economic activity is generating wage pressures, while aggressive Fed tightening is applying pressure to USD/Asia crosses. Against this backdrop, the plan to revise the CPI suggests that actual inflation might be not only accelerating, but also faster than captured by recent prints.
• The argument that there's a disconnect between Malaysia's CPI and consumers' experience has been doing the rounds for some time, prompting the Malay Mail newspaper to construct an alternative gauge of price growth. The Cik Kiah Index tracks a basket of goods and services consumed by a typical household from the bottom 40% income group, thus focusing on staple products. The latest publicly available reading of the CKI (April 2022) was 1pp higher than the official CPI reading of +2.3% Y/Y, partly because food is a notable driver of overall prices.
• An effective CPI rebase to reflect a larger perceived increase in the costs of living would raise pressure on Bank Negara Malaysia to increase interest rates at a faster clip. Although Malaysia's central bank does not operate an explicit inflation target, it is mandated with promoting monetary stability, which includes low and predictable inflation. With its Monetary Policy Committee holding just six meetings per year, factoring the revised CPI into the MPC's deliberations would incentivise tightening by larger increments.