THE cost of living has been escalating over the last 10 years, as reflected by the following indicators. On average, over the 10 years, domestic consumer prices have gone up by 2.5% per annum, while asset prices (eg residential properties) have gone up by 6.1% per annum.
This was largely due to cost push factors from rising global commodity prices over the period – rice up 47.4%; wheat 61.5%; crude palm oil 46.6%; crude oil 142.6%.
The rising cost of living poses an immediate challenge to the domestic economy and it must be addressed appropriately.
Since September 2013, inflation has jumped 3.2%. The rise was largely due to cost-push pressures, after the Government emphasised subsidy rationalisation plans, with a first hike of 20 sen on petrol and diesel as well as abolition of subsidies on sugar.
In early January this year, new power tariffs for residential users were introduced, while the Government decided to raise gas prices for non-power users beginning May 1 from an average of RM16.07/MMBtu to RM19.32/MMBtu.
While the Government focuses on targeted subsidies with a gradual phasing-out of subsidies on petrol (RON95), the unpleasant reality is the general rise in overall inflation in recent months.
The issue at stake is, how will our economy and Malaysian households cope with this rising inflation at large, and especially the cost of living?
Fortunately, our macroeconomic performances seem to be on track thus far: firm unemployment rate at 3% and a robust growth of 6.2% in 1Q14, despite some noises from major economies like China, the United States and Europe.
However, the resilience is only half-truth of the story. Clearly, inflation has eaten into household consumption. Close to 40% of Malaysian households have a combined monthly income of less than RM3,000.
These households and the middle income bracket of just above the threshold have had their budgets squeezed.
In this regard, incidents of bankruptcy have also risen in the past few years, from 13,238 in 2007 to 21,987 in 2013.
How to cope
To alleviate the hardships of the low income bracket, the Government opted for a fiscal policy choice. Bantuan Rakyat 1Malaysia (BR1M) cash handouts is a targeted effort to assist those in the low income group.
However, if cash handouts are made a permanent feature, the rakyat will start to expect and rely on this policy for their economic wellbeing. The endowment effect of BR1M will eventually be no different from the mentality of long-term dependency on subsidies for fuel and energy.
For sustainable economic wellbeing, households should take proactive measures to safe guard themselves of economic hardships.
When the going gets tough, the tough starts saving. The virtue of saving for a rainy day is a relief to weather the inflationary storm. Therefore, to save is to first budget.
A guide to efficient budget planning is the 50/30/20 thumb rule, coined by Harvard bankruptcy expert Elizabeth Warren and her daughter, Amelia Warren Tyagi in their book, All Your Money Worth: The Ultimate Lifetime Plan.
According to the rule, one should spend 50% of net income on “needs” such as groceries, insurance, utilities, and housing; 30% on their “wants” or non-essential items, such as gadgets, cable TV, and coffee; and 20% on savings and retirement accounts.
Maintaining a household balance sheet is the first step to responsible financial management and taking charge of your money. With discipline, maintaining monthly financial targets will be more transparent.
Long-term budget requires setting apart savings for short-term, mid-term and long-term financial goals. Besides these goals, you should always factor in inflation too.
To beat inflation and protect your savings, you should invest part of your savings in assets that have higher returns that the anticipated inflation rate. Currently, as inflation rises above interest rates, consumers should be concerned about the decreasing value of their money saved in banks.
Perhaps, what is even more worrisome than your money losing value is to owe money – debt. Indebtedness among Malaysian household debts is currently one of the highest in the region.
According to Bank Negara, household debts in Malaysia have risen at an average rate of 12% annually over the last five years.
In fact, household borrowing last year has risen to 86.6% of the total value of the economy, compared with 81% in 2012.
Unfortunately, financial literacy is still lacking in certain quarters and poor money management has led to over 20,000 Malaysians being declared bankrupt last year, a 12% increase from the previous year.
Out of the over 20,000 Malaysians declared insolvent last year, 26.5% were due to defaults in car loans, followed by housing loans, personal loans and business loans. Notably, personal loans saw an annual increase of 21% from 2010 to 2013 and represents 16.8% of total household debts.
Good debts, bad debts
However, not all debts are bad apples. One needs to distinguish between good and bad debts. Taking up personal loans and unnecessary car loans are bad debts. Loans that are spent on unproductive matters will only shave off part of your monthly disposable income. It does not add value to your assets other than satisfying your cravings.
Unmonitored credit card spending is a sure way to accumulate bad debts. During inflation, it might be tempting to stretch your budget by paying through credit.
Further indebtedness will soon have its consequences.It is also crucial for one to fully settle credit card balances at the end of every month to avoid the 16% charge.
On the other hand, taking up a housing loan when you are financially capable – and after doing sufficient research - can be a good move, as it is seen as a good debt. After all, the value of properties tends to only appreciates over time. However, you must assess your cash flow to ensure that you are able to service the monthly repayments to avoid a loan default.
These are only some tips to help battle inflation and cope with rising costs. Inflation is a time for adjustment.
A gradual long-term economic equilibrium to higher prices will serve well in the future, rather than short-term subsidy plugs to defer the painful adjustment.
Having weathered through this adjustment, the economy would be able to cut its excesses and the households would be even more resilient to future inflation and also economic shocks.
With a little discipline, prudent spending goes a long way.
Manokaran Mottain is chief economist at Alliance Bank Malaysia Bhd