Primer| Safety Nets

Measuring the Cost of Living

Understanding the ways it is measured today and the issues faced.

By Editorial Team | 16 July 2019

How do we measure the cost of living today?

  • The cost of living, simply defined, is the amount of money needed to sustain a certain standard of living. 
  • There have been some recent attempts at measuring the ‘official’ cost of living in Malaysia*. Historically though, the measure most often referred to is the Consumer Price Index (CPI).

*Not including unofficial estimates e.g. expat forums

  • Strictly speaking, the CPI measures the change in the cost of living; it is not an absolute amount or RM figure. The CPI measures price changes of a constant basket of goods and services that are considered ‘typical’ purchases for a particular population group in Malaysia.
  • The basket comprises 12 categories of goods and services as outlined by the United Nation’s ‘Classification of Individual Consumption According to Purpose’. The weightage between the 12 categories is based on expenditure patterns obtained from the Household Expenditure Survey and is updated periodically*.
Exhibit A: Composition and weightage of CPI; Source: Full Monthly CPI Report, DOSM1 (registration through DOSM portal required for access)
  • In measuring the CPI, the Department of Statistics Malaysia (DOSM) surveys prices of goods and services monthly from about 17,000 retail outlets in Peninsular Malaysia, 2,500 outlets in Sabah and 2,300 outlets in Sarawak*.

*Technical Notes from the full monthly CPI report issued by DOSM. Registration through DOSM portal required for access

What’s the issue with CPI?

  • Using the CPI as the sole or main measure or gauge of the cost of living can be misleading. As mentioned, the CPI is first and foremost a way to measure change in prices i.e. inflation. Nevertheless, even as a measure of inflation, there are a few key issues to be aware of.
  • Firstly, while CPI movements are reported by state and by expenditure category (see DOSM’s CPI report for April 2019), the CPI does not capture the spending basket of households in different income brackets. And different income brackets, across different locations, experience different rates of inflation.
  • In their 2015 Annual Report, Bank Negara Malaysia (BNM) showed that lower income households (LIHs) tend to experience higher rates of inflation. Lower income households in urban areas also tend to experience higher inflation than LIHs living outside the city.
Exhibit B: Inflation by state, area & income group; Source: BNM 2015 Annual Report
  • Secondly, the CPI does not include mortgage payments, only rent. As argued by economists (for example, here), excluding mortgage payments understates the CPI, given the fact that house prices have increased much faster than other measures of inflation in the last decade.
  • Thirdly, the CPI measures pure price movements but not necessarily quality. If prices increase but quality of the relevant goods and services deteriorates, the cost of living could be worse than the rate of inflation suggests. However, if quality has improved along with price increases, the cost of living is arguably improved. Quality changes are hard to quantify of course, but this is worth bearing in mind.
  • Fourthly, our psychological biases. Putting aside the issue of the CPI’s composition for the moment, we as humans tend to make generalisations based on selected information. Research has shown that consumers tend to remember large price changes and prices that have risen rather than those that have fallen. The CPI may not accurately reflect our experience of inflation, but our sense of rising prices may also be magnified by our human biases.

What lies ahead?

  • Having a credible and widely accepted measure of the cost of living is important not only in setting wage and other related policies, but also as a point of reference for ordinary citizens and voters. The Belanjawanku, a collaboration between the EPF and University Malaya’s Social Wellbeing Research Centre published in March 2019, was announced as an attempt in this direction.
  • Said to be based on the actual spending patterns of Klang Valley households, the expenditure guide Belanjawanku shows the minimum monthly spend of six different types of households, from singles to elderly couples. Nevertheless, some questions have been raised about Belanjawanku particularly on the cost of housing, suggesting room for improvement in potential future versions of the guide.

Read our editorial on our suggestions to strengthen the Belanjawanku.

  • In the meantime, the Domestic Trade and Consumer Affairs Minister has cited the establishment of a new cost of living index that would be more reflective of the real cost of living. Among the agencies said to be involved are DOSM, Khazanah Research Institute (KRI) and the Malaysian Competition Commission (MyCC).

Curious about the price of nasi lemak or apples in different states? Check out the Annex to DOSM’s monthly CPI reports

Some questions from fans of policy and ordinary citizens alike:

How should we determine the ‘minimum’ cost of living? Is it related to a minimum quality or standard of goods and services (e.g. housing), and if yes how is that determined?

Even though it’s not politically correct, would it be better to have Cost of Living measurements by income group and location, so that changes for lower income households would be more apparent?

Other useful links:

Inflation and the Cost of Living (BNM)
Cost of Living in Malaysia, crowdsourced (Numbeo)
Malaysia House Price Index (Trading Economics)
Malaysia Food Inflation (Trading Economics)

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