How Does Inflation Affect You?

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If you are an average Malaysian, and the topic of inflation comes up, the first thought that comes to mind is the ever-increasing price of daily necessities today.

On the surface, Malaysia’s current inflation rate is just 1.5% for December 2023 according to the Department of Statistics Malaysia. Yet, any visit to your nearby supermarket and you will realise that your RM10 ringgit is not going to stretch as far as it did last year.

Plus, the removal of some electricity tariff rebates since January 2024 that will result in higher bills. At the same time, the government has implement a 10% tax on low value online goods starting 2024. The combined effect will burn a bigger hole in your monthly budget even if inflation has stabilised for now.

But how much do we really understand about inflation, and how does it affect our purchasing power?

What is inflation?

Let’s get technical for a moment. According to the Cambridge Online Dictionary, the definition of inflation is “a general, continuous increase in prices”. The inflation rate, then, measures the rate at which these prices increase, in a percentage.

An inflation rate of 3% (based on the national Consumer Price Index) means that on average an individual’s expenditure on staple goods and services have increased at the rate of 3% over the course of a year.

Inflation is measured with the Consumer Price Index

With a clearer understanding of what inflation is, how is it affecting Malaysians?

Malaysia’s overall inflation rate is measured through the Consumer Price Index (CPI). This data is gathered by the Department of Statistics Malaysia (DoSM) who report the monthly results in the form of the CPI Index.

According ot this index, Malaysia’s annual inflation rate for 2023 came in at 2.5% which showed a decrease compared to 3.3% for 2022. As mentioned earlier, the current rate is now at 1.5%.

What this means is, the rate at which prices were increasing was faster in the last two years. However, to curb inflation’s negative effects, the Malaysian government has included some essentials goods in their list of controlled items to maintain affordability of staple foods and goods, to prevent price speculation during shortages, and to slow inflation.

What about purchasing power?

Naturally, purchasing power deteriorates due to inflation. With prices increasing, it is inevitable that the same Ringgit amount has the power to buy you less goods and services than before.

Take the humble roti canai example, which used to cost about 50 to 70 sens a piece more than 10 years ago but today it can cost you nearly RM2 in the main cities in the Klang Valley.

Classic examples of inflation

You have probably come face-to-face with inflation in your life. A movie ticket that used to cost RM8 when you were a teen is now at least RM18 on weekdays. But what is the reason for the increase?

Demand vs supply

Inflation can be due to the imbalances in demand and supply. The price of diesel has more than doubled since the early 2000 because the demand for diesel has increased significantly around the world while supply has not increased at a proportionate pace.

In year 2000, diesel cost 70 sen per litre and today it costs a whopping RM2.15 per litre.

Increase in manufacturing cost

Another reason for inflation can be a result of the increase in manufacturing cost. For example, due to the recent petrol price hike, we see other items increasing in price as well.

This is due to the increase in transportation cost to transport the goods from point A to B. Consequently, the price of final goods are hiked up over a longer period of time.

Inflation would definitely pinch the pockets of all consumers in the long run, in one way or another. Hence, consumers must pick up smart financial management practices to better navigate through the increasing inflation and its accelerating rate.

How can Malaysians combat inflation and other price increases?

Consumers rarely have much influence on the inflation rate as an individual as it fluctuates in every country. However, what Malaysians can do is be smart about managing their money to outfox inflation and higher costs of living.

Even small steps to make use of financial facilities to optimise cash flow monthly can help you win against inflation. Even using the right credit card for petrol or groceries can help you in the long run.

Choosing the right investments to make your savings work harder is another way to try and keep ahead of inflation.

Finally, the best way to make good money decisions that help you stay ahead of inflation is by acquiring sound financial knowledge. Use iMoney’s comprehensive financial intelligence resource to help you make wise decisions when it comes to saving and making money.