BNM says structural reforms needed to address cost of living issues

KUALA LUMPUR (30 March): Structural reforms are needed to address income and cost factors to improve household resilience to future shocks, Bank Negara Malaysia (BNM) said.

In its 2021 annual report, the central bank said the high cost of living is a long-standing problem, which has been exacerbated by the Covid-19 pandemic, amid disrupted supply chains that have led to imbalances between supply and demand.

“Short-term solutions, while warranted in certain circumstances, would not prevent this problem from recurring and could lead to unintended consequences. Therefore, structural reforms addressing both revenue and cost factors are essential. to build household resilience to future shocks,” he said.

The central bank also explained the distinction between the cost of living and inflation, the former referring to the amount of household expenditure, including financial obligations, to maintain a certain standard of living.

Since spending habits are a function of household income level, location and consumption baskets, he said the cost of living differs from household to household.

Meanwhile, consumer price index (CPI) inflation captures increases in consumer prices and is often used to gauge changes in the cost of living, he said, although households may feel that CPI inflation does not reflect observed price changes over one day. day by day. This, he said, is because CPI inflation tracks changes in the price of a fixed basket of items that represents the average household spending pattern and does not take income into account. Household.

Furthermore, households are likely to use different sets of information when evaluating changes in the cost of living and are primarily driven by price changes of frequently purchased items – called frequency bias and measurable by the price index at daily or PPE – as opposed to more durable items. . Households also tend to remember price increases rather than decreases, he said, adding that this is called memory bias and can be measured by the perceived price index.

Looking at price movements in the CPI basket, BNM said price pressures were driven by specific items – fuel, electricity, fresh meat, furniture and furnishings, eggs, and janitorial and cleaning materials. housing repairs – which represent 20% of the trash.

These price pressures were due to external factors – both global and domestic – such as high freight costs due to container shortages which led to higher import prices, higher energy in the world and rising world prices for food grains such as soybeans and corn.

For example, soaring global soybean and corn prices to multi-year highs in 2021 has impacted domestic producers in the form of higher import prices and increased costs for livestock producers. which has resulted in higher prices for chicken and eggs for consumers.

Some food producers also faced difficulties in immediately meeting increased consumer demand as restrictions were lifted, while adverse weather conditions compounded those difficulties, the central bank said.

While rising prices are a problem for households, the severity varies from household to household. For households in the bottom 40% income group (B40), who spend a greater proportion of their monthly income on food (35% of consumption expenditure) – compared to the middle 40% or M40 (30%) and to the top 20% or T20 (23%) households — the implication is that where price pressures are driven by food commodities, cost of living pressures will disproportionately affect low-income households.

“Second, the pandemic has resulted in weak revenue growth. This means that in the face of marked price increases, some households find it more difficult to maintain their consumption. To the extent that low-income households have relatively lower net income (income, net expenditure and financial obligations), this makes them relatively more vulnerable to cost-of-living pressures,” the central bank said.

Therefore, tackling the cost of living problem requires action on both the revenue and cost fronts, the BNM said.

Although the pandemic has caused a significant shock to incomes, she said the ensuing economic recovery provides a window of opportunity to pursue policies aimed at creating high-productivity, higher-income jobs.

On the other hand, he said reducing costs requires a review of the supply chain, which includes diversifying food import sources to mitigate concentration risk.

“Furthermore, encouraging quality investments in the agrifood sector could better protect food prices against future shocks. Given the over-reliance on low-productivity practices and with the threat of disruption from climate change, such a move can reduce the risk of amplifying the cost of living in the long run,” the bank said.

Read more stories from the BNM Annual Report 2021 here.

Julio V. Miller