This article first appeared in The Edge Malaysia Weekly on July 18, 2022 - July 24, 2022

IT was a busy morning at a petrol station along the New Klang Valley Expressway near Subang. Inside the convenience store, it was a hive of activity as patrons went about their business, from withdrawing cash and buying snacks and drinks to topping up their Touch ’n Go cards.

A man, probably in his 40s, went over to the food aisle and asked the petrol station employee who was busy sorting the pastries on the trays how much a sardine puff cost. The employee replied, “RM1.10,” pointing to the sign in front of the tray.

The man asked again, as he wanted to make sure the price was for one sardine puff. From his appearance, he could have been a lorry attendant as many trucks and trailers stopped at the petrol station at that time of the day. “It’s RM1.10 per piece,” the employee stressed.

The man laughed. But he stopped laughing when he realised the employee was not joking. He turned and left, resigned to the fact that he would not be having a sardine puff that morning.

That is the reality that many are contending with these days, especially if one belongs to the bottom 40% (B40) or middle 40% (M40) income brackets. In Malaysia, although RON95 petrol is subsidised, food costs are rising due to supply shocks and a weaker local currency against the US dollar, which means the purchasing power of every ringgit is shrinking.

On the other hand, a highly successful businesswoman who runs an advertising agency spends RM150 per day on average on takeaways for her family of four. While she acknowledges that prices have been rising, things are still manageable.

“I am concerned about the rising prices but, at the moment, I can still manage. The exchange rate has not been favourable to me. So, instead of shopping on Net-A-Porter, I shop on Zalora for my clothes and shoes,” she says.

As a high-income earner, she acknowledges that she and her husband are outliers compared with the majority of Malaysians, especially those in the B40, who are among the worst hit in the current inflationary environment. Based on the Household Income and Basic Amenities Survey Report 2019 released by the Department of Statistics Malaysia (DOSM), the B40 spends on average 24.2% of their monthly income on food and non-alcoholic beverages.

This is much higher than the M40’s 18% and the T20’s 12.6%. Food and non-alcoholic beverages are the second largest expense item for the B40 and M40 after housing, water, electricity, gas and other fuels.

Fortunately, the property market is in a slump and petrol, electricity and gas are subsidised. But apart from a few staples that have price controls, most foodstuffs are not subsidised.

The increase in prices is reflected in the Consumer Price Index (CPI), which recorded an increase of 2.2% in the first quarter of 2022 and rose to 2.3% in April and 2.8% in May. Food inflation increased from 3.8% in 1Q2022 to 4.1% in April and 5.2% in May. Core inflation — a measure of the underlying inflation trends excluding food and energy — has increased steadily to 2.4% in May, from 2.1% in April and 1.8% in 1Q2022.

With food costs going up, the B40 and M40 are certainly feeling the pinch.

“Inflation, even inflationary expectations, must be dealt with — primarily [through] a monetary policy application — because inflation is very costly to the economy and it affects the poor disproportionately as their wage growth will be far outpaced by inflation, greatly reducing their purchasing power, and therefore their consumption basket and quality of life,” says economist Dr Nungsari Radhi.

If the current price pressures continue, it can derail decades of work done by the government to reduce income inequality among the various income groups. The government has been addressing the issue of socioeconomic inequality since 2006, when the income distribution among B40 households decreased from 14.5% in 1990 to 13.2 % in 2004. Meanwhile, the T20’s share of income increased to 51.8% from 50% during that period.

The efforts that the government has made to increase income distribution among B40 households include increasing productivity through human capital development. During periods of low inflation and stable economic growth in the years prior to the Covid-19 pandemic, this contributed to income equality, as can be seen through the reduction of the Gini coefficient.

The Gini coefficient, or Gini index, is a statistical measure of economic inequality in a population. It measures the dispersion of income or distribution of wealth among the members of a population. The higher the ratio, the more unequal the distribution of income, and vice versa.

Malaysia’s Gini coefficient increased from 0.442 in 1990 to 0.462 in 2004. From there, it decreased to 0.399 in 2016 as the income share of the B40 increased from 14.6% in 2007 to 16.4% in 2016, while that of the T20 decreased from 49.8% in 2007 to 46.2% in 2016, according to DOSM.

However, Malaysia’s Gini coefficient increased slightly to 0.407 in 2019 as income share of the B40 decreased to 16% while that of the T20 rose to 46.8%. This means income inequality has been growing since 2017.

The Gini coefficient is expected to continue increasing as food price inflation continues unabated, with no end in sight to the war in Ukraine, global supply chain disruptions and persistently high commodity prices.

“As at the latest data [DOSM estimates], the Gini coefficient rose to 0.411 in 2020, slightly higher than the record low of 0.399 seen in 2016,” says Zafri Zulkeffeli, an economist with MIDF Research, in response to email queries from The Edge.

He adds that the overall median wage fell 15.6% in 2020. When comparing between education levels, those with no formal education experienced a 13.9% decline in wage growth, while those who received up to primary education saw their wages decline 18.3%. Those with secondary education experienced a decline of 16.6% in their wages, whereas those with tertiary education had the lowest contraction rate at 10.3%.

“We believe the pandemic crisis has caused widening inequality, and with rising food-driven inflationary pressure, the low-income group is hit the most,” says Zafri.

As the B40 spends a higher proportion of their income on food than any other income group, their purchasing power is greatly affected by rising food prices. Food is only the fourth largest item on the T20’s list, making up 12.6% of their average monthly expenditure.

It should be noted that the T20 spends 15.5% of their income on transport. As fuel is highly subsidised and for everyone’s benefit, it can be assumed that the T20 does not feel as much pain as the B40 and, to a lesser extent, the M40.

“It [rising food prices] has been very bad for us. Our monthly expenses have increased by as much as 50% compared with during the pandemic,” says Azmah, 37, who runs a school van operation with her husband, Marzuki, in Kajang.

Azmah, who together with her husband have five school-going children, finds it pricier these days to buy eggs, their main source of protein. She says the price of Grade D eggs, which the family consumes as a substitute for more expensive proteins such as fish and beef, has risen 50% to RM15 per tray.

While she can still consider buying the eggs at this price, availability is an issue. “Even Grade C eggs are hard to find, sometimes. So, when that happens and only Grade B, A and Double A are available, we won’t buy eggs, because they are just too expensive, especially when you have many mouths to feed,” says Azmah.

To cope with the rising prices of food and other goods and services, she and her husband have taken on additional work to supplement their income. Prior to the pandemic, the couple did not have to take on extra work as their combined monthly income of RM3,000 met their needs.

It must be noted, however, that the growing inequality is not solely due to inflation and rising interest rates.

Julia Goh, senior economist at United Overseas Bank (Malaysia) Bhd, says rising interest rates are necessary, especially when the economy is already recovering and several signposts suggest that demand has improved.

“Raising rates is also to avert a worsening inflation exacerbated by elevated cost pressures and higher wage demands that lead to an inflation spiral. In that situation, it would leave everyone worse off. Therefore, measured rate hikes at this juncture are aimed at anchoring inflation expectations,” Goh says in an email response to The Edge’s questions last Friday.

Goh says the segment that is most affected by rising interest rates is the high-income group, owing to their higher borrowings for residential home purchases, of which over 85% are floating rate loans. Higher interest rates also benefit savers with higher fixed deposit rates, she adds.

Compared with other countries battling runaway inflation, Malaysia’s CPI does not look as bad because of the government’s policy of subsidising and capping the prices of many essential items.

“This [subsidies and price ceiling] will offer some relief and protect consumers by keeping prices low in the current environment of rising consumer price pressures and cost of living,” says the Associated Chinese Chambers of Commerce and Industry of Malaysia’s Socio-Economic Research Centre (SERC) in its Quarterly Economic Tracker for April to June 2022.

SERC estimates headline inflation at between 3% and 3.5% in 2022, higher than Bank Negara Malaysia’s expectation of between 2.2% and 3.2%. Still, the rising prices of goods and services are expected to crimp the spending power of lower- and middle-income households, leaving them with reduced disposable incomes, it says in the report.

This is especially so as salaries have not risen in tandem with inflation so far in 2022.

SERC executive director Lee Heng Guie says that based on the wage data in the manufacturing sector, nominal wage per employee increased by 1.9% between January and May, which is lower than the CPI growth of 2.4%.

“This means rising prices of goods and services, generally by at least 8%, and high cost of living will crimp consumer spending power,” Lee tells The Edge in an email.

While salary growth has not been able to match price increases so far this year, wages were growing faster than the CPI before the pandemic.

MIDF Research’s Zarif says that based on historical data, average nominal wage growth from 2016 to 2019 was 5.9% per year while the average inflation rate was only 1.9%. “So, Malaysia has always recorded positive real wage growth at an average of 4% per year. Driven by the reopening of the domestic economy and continuous expansion of the external sector in 2022, we believe nominal wage growth will increase by 5% this year.”

Referring to the Malaysian Employers Federation (MEF) Salary Survey for Executives and Non-Executives from 2018 to 2022, SERC’s Lee points out that the average salary increase was between 4.37% and 4.88% for executives while non-executives saw their wages increase between 4.17% and 4.88%.

The increase in minimum wage to RM1,500 per month may not be much help in the light of rising prices. That is because most workers already received more income than the newly implemented minimum wage back in 2019, except for those with no education and those in the 15-to-19 age group.

According to Zafri, those with no education received an average salary of RM1,436 in 2019, while those in the 15-to-19 age group received RM1,450. “With RM1,500 as the minimum pay, we view this as a normalisation process during the post-pandemic period.”

He adds that the minimum wage is lower than the living wage cited by Bank Negara in 2018. The living wage in Kuala Lumpur was RM2,700 a month for a single adult and RM6,500 for a couple with two children in 2019.

SERC’s Lee says the increase of between RM300 and RM400 for workers earning the previous minimum wage of RM1,100 and RM1,200 will help ease their financial burden from rising prices and increase higher debt servicing payments.

The higher minimum wage is said to be inflationary, though. Lee points out that the increase of 25% to 36% in the minimum wage is steep and occurred at a time of increasing cost of production. Therefore, businesses are compelled to pass on the increased costs to consumers.

“This will eventually hurt the lower-income bracket, with more than half of their expenditure (53.3%) spent on basic necessities (food at home, clothing, housing and utilities),” he argues.

Lee says the growing inequality is tied to several factors, including the increase in income, technological changes, productivity, economic welfare and whether there is adequate social protection for the vulnerable and lower-income households.

UOB Malaysia’s Goh says that while the higher minimum wage does spill over to adjacent income segments, which may be adjusted upward accordingly but not necessarily by the same quantum, there have been reports on how wage hikes affect prices. “Some businesses have either raised the price of their products or services to implement the wage hike, which further adds to inflation pressures, or employers reduce the working days of workers to manage their operating costs.

“Therefore, despite higher nominal wages, the actual take-home pay and purchasing power of workers may not have improved much. In that sense, the issue of inequality is likely to remain [despite the higher minimum wage].”

As mentioned earlier, the government has been doing its bit to ensure that lower-income earners are supported during this period of high inflation through various subsidies and price ceilings.

It is estimated that the government will spend RM77.3 billion on subsidies this year — the most it has ever spent on subsidies — to contain rising prices. This includes the RM11.7 billion for Bantuan Keluarga Malaysia direct cash assistance to those who qualified for the programme.

However, the government is urged to look at improving supplies and assisting producers to ensure the sustainability of supply and price management, so that the price of goods, especially essential food items, will not continue to increase and eat into the people’s purchasing power.

Additionally, there must be efforts that focus on social upward mobility, says Bank Islam Malaysia Bhd chief economist Dr Afzanizam Abdul Rashid. To do so, the government should focus on investment policies that will upgrade the way business is done, especially on R&D that will increase the complexity of our products and services, he adds.

“Following this, our education programmes have to be aligned with the current needs of industries while making a significant contribution to the academic literature in each field,” Afzanizam tells The Edge.

“Also, better coordination among ministries and government agencies are critical to ensure they are working on a common goal. Silos will lead to confusion and a waste of resources.”

He says existing resources need to be reallocated for the betterment of the people in the long term. Structural changes to subsidies, for instance, are a strategic imperative to make the country more resilient, with a workforce that is knowledgeable and well accepted by industries. “That way, they may get better income through employment or entrepreneurship,” he adds.

Governance issues also need to be emphasised as corruption could lead to a rise in business costs. So does financial literacy as excessive indebtedness and financial scams will also affect the livelihoods of the people. In a nutshell, the areas for improvement are multifold in order to strengthen society’s purchasing power, says Afzanizam.

Meanwhile, for Azmah and Marzuki, the inflationary environment means they will have to carefully allocate their income. Gone are the days when they could take the children to their grandfather’s hometown in Pahang every other month, or spend on more nutritious food. “We just have to make do now by pinching from here and there to make ends meet,” says Azmah.

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