Article: High cost woes ahead for M'sians - fuel price,food (20 Nov 2017)

Topic: Measuring cost of living (Chapter 11)

Introduction:

Based on the article, price of weather-induced food and fuel prices will be increasing in the
coming months. This will consequently push the inflation rate up. As inflation rate increases, cost of
living for the community will also increase. Inflation in September increase due to the high cost of
transportation, food and beverages. The weakening Malaysian Ringgit also has also increase the
inflation. Due to all of these reasons, the cost of living is increasing.

Analysis:

Inflation refers to a situation in which the economy’s overall price level is rising. The inflation
rate is the percentage change in the price level from the previous period. The formula for inflation
rate is:

CPI in Year 2  CPI in Year 1

Inflation Rate in Year 2= 100
CPI in Year 1
As stated in the article, the inflation rate has decreased from September to October, 4.3% to 4.1%.
The high inflation rate in September is mainly due to the high transportation costs. The weakening
Malaysian Ringgit and the strengthening of domestic demand has also raised the inflationary
pressure in October. Due to the inflation rate increasing, the cost of living for the community has
also increase.

The consumer price index (CPI) is a measure of the overall cost of the goods and services
bought by a typical consumer. CPI is used to monitor changes in the cost of living over time. As CPI
rises, a typical family may have to spend more to maintain the same standard of living. There are a
few ways to calculate the CPI. The ways are:

 Fix the basket

 Find the prices
 Compute the basket’s cost
 Choose a base year and compute the index
 Compute the inflation rate

As stated in the article, inflation in September rose mainly due to higher transportation costs which
is the highest among other components of the consumer price index (CPI).

GDP deflator is a measure of the level of prices of all new, domestically produced, final
goods and services in an economy. GDP deflator is measured as:

Nominal GDP
GDP deflator =  100
Real GDP
The GDP deflator reflects the prices of all goods and services produced domestically, whereas the
consumer price index reflects the prices of all goods and services bought by consumers. The
consumer price index compares the price of a fixed basket of goods and services to the price of the
basket in the base year whereas the GDP deflator compares the price of currently produced goods
and services to the price of the same goods and services in the base year.

The table shown below is the comparison of CPI and GDP deflator of Malaysia 2014 to 2016.

GDP Deflator CPI

2014 109.28 111.8
2015 108.87 114.8
2016 111 116.9

118

116

114

112

110

108

106

104
2014 2015 2016

GDP Deflator CPI

Conclusion:

Due to the increasing inflation rate, the cost of living has increased. The weakening
Malaysian Ringgit also has also increase the inflation rate. When the CPI is on the rise, to maintain
the same standard of living, each family needs to spend more. GDP Deflator also affects the price of
goods produced in the country. The GDP deflator differs from the CPI because it includes goods and
services produced rather than goods and services consumed. Therefore, these reasons affects the
cost of living for a typical family in the community.