Tuesday, May 23, 2017

Inflation Perceptions

The Guv on inflation perceptions (excerpt):

Why doesn’t inflation rate reflect cost of living? All about perception, BNM says

KUALA LUMPUR, May 19 ― Bank Negara Malaysia (BNM) suggested today that public perception of inflation tends to be higher than the actual rate, with the bias shaped by their personal experience of paying for food and transport.

This comes as the central bank announced a headline inflation rate of 4.3 per cent in the first quarter this year compared to 1.7 per cent in the previous quarter, owing to the hike in fuel pump prices and shortages of fresh fruit.

“Public perception of inflation is in fact influenced by frequently purchased price such as food. This item typically experience higher inflation.

“However household also spends on other items, such as clothing which are in fact experiencing price decline,” BNM governor Datuk Muhammad Ibrahim said in a press conference here.

This perception is also formed by spending on transport, a sector high price volatility, he said.

In comparison, Muhammad said the Consumer Price Index (CPI), or the inflation rate, is a reflection of overall price changes in economy that reflects average consumption of an average household.

I’ve been writing about this for years (latest here). BNM has also published an article in their quarterly bulletin that actually measures the degree of “misperception” (link here). The latter especially is worth a read. For a really deep look into the whole subject, buy the book!

6 comments:

  1. 2 questions, appreciate your enlightenment.

    1) How do central banks decide on CPI weightages? E.g. US's F&B at 15% while Malaysia's at 30%; US's housing at 40% while Malaysia's at 23%. It seems to me that each central banker have their own painting to paint.

    2) Sorry for going a bit out of scope -- why is the global inflation so low after the massive money printing? Warren Buffett recently mentioned that he believes interest rates may stay below historical average for some time to come (like Japan), implying low inflation over mid-to-long term. Do you agree?

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    1. @Fung

      To answer your questions:

      1. Short answer: They don't decide, people do. Long answer: The weights come from expenditure surveys conducted by national statistical offices i.e. it's based on what people actually spend on. As a rule, lower income countries spend a greater proportion of their income on food, hence the weightage in their CPI is higher compared to richer countries.

      2. Yes, I agree. On the inflation question, I wrote these earlier (they're a bit long):

      http://econsmalaysia.blogspot.my/2016/04/the-difference-between-quantitative.html

      http://econsmalaysia.blogspot.my/2014/08/the-fallacy-of-composition-and-monetary.html

      As to why interest rates will remain low, I think for a couple of reasons:

      i. Interest rates aren't really that low historically. Instead, interest rates between 1960-2000 were abnormally high. Current long term rates aren't all that far from the long run historical average.

      ii. Demographics. Based on lifetime income-consumption patterns, the marginal savings rate tends to peak between the ages of 40-50. A lot of advanced economies (like Japan, Singapore) have median ages squarely in this age bracket. Higher savings (more funds to invest) will continue to depress yields for some time to come (roughly, the next half century or so). But developing economies will by then also be approaching the same peak.

      Unless something structural changes (a global war, for example), I don't expect a secular rise in interest rates until after the turn of the century.

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  2. Thanks Hisham for your free lessons. Given your position at EPF, they'd have costed us thousands ringgit for your time. :)

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  3. Morning all, I remember months or year ago, every-time FED increase interest rate, RM would tank. Today it appreciated. What happened???

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    1. Zuo De

      I would actually put it the other way around - it's the USD strengthening or weakening.

      In this instance, I think it's basically expectations of the future that is driving the USD. Previously, Fed rate hikes were seen as precursors of more rate hikes to come. Now, the markets are having doubts about how much more the Fed can tighten policy, without tanking the US economy.

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  4. TO THOSE WHO ARE NOT AWARE:

    Money is so taken advantage of and abused.

    What is the economy utilized for?

    The economic system serves as a system where people who work get paid according to their work amount, efforts and difficulty.

    Do employees actually get paid according to how much they work?

    How can you own a business make millions of dollars and pay your employees the bare minimum salary?

    Yes, owning a business is a lot of work, but so is having a labor job, however, to keep all the wealth to yourself is so unethical most people probably don't even enjoy their job and only do it to survive.

    Yes, I do believe no man should profit without working and that is exactly what I am addressing, the top 1% and other wealthy businesses or industries or companies or organization's profit way more than they labor in other words, they don't pay their fare share and the effect it has on society and the individuals they employ are harmful.

    And keep in mind the political influence these mega corporations have on society and who they employ is so horrific the gay pride agenda to name one.

    Now weather you agree with the gay agenda is not the topic of this writing the topic is the economic and societal breakdown that is happening as a result of industrial powers.

    Imagine a successful business where most of its income goes back directly to the business and the employers instead of going into the pockets of a greedy business owner.

    The employees would probably be paid way more than they are now, maybe in some cases 50$ an hour for flipping burgers or something.

    I am not against success I am against greed, many of our problems can be traced back to greed like immoral and dangerous GMOs and vaccination dangers and countless other problems.

    I don't believe it is ethical for a person to live in a mansion and only have an occasional 3 hour meeting as their job.

    Simply because you took advantage of the economic system doesn't make your life more special than the 8$ and our employees that are slaves paying for your personal pursuits of pleasure.

    I recognize it is not illegal to make millions of dollars growing GMO crops, paying the farms 8$ an hour or something low like that or owning Mc Donalds and doing the same however it is profoundly unethical and destructive.

    Unfortunately, money = power, including political influence, the more money you have, the more magnified your potential to do good or bad with the money and the influence it brings to you.

    Not everyone in America has equal power and influence, those at the top can fund whatever they want be the cause good or bad it is up to them to decide what to fund.

    Utilize what you have for the greater good, we can't hold you accountable for what you can't do, however we could for what you can do.

    This world is far from being fair and just that doesn't mean we shouldn't try to make it fair and just I do not advocate for stealing from the rich to give to the poor that is communism, I urge that the greed and abuse stops.

    I patronize local business I believe they are more environmentally and economically friendly the gap between the business owners and the employees profit is less extreme.

    I believe in the do it yourself independence model, I believe as technology and academic knowledge increases, we should be wise enough to produce our own necessities like energy, to collect our own water if possible, to grow our own food, to liberate ourselves from the corporate and government dependency that is installed by design to retain the population under their dominance and influence.

    The less we rely on finances to make a living the less we are slaves at the mercy of those who moderate the flow of money like the wealthy who employ us to name one.

    We need regulations that protect the people from the corporations, not the corporations from the people and their interests.

    We must also have good interests for this idea to work.

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