Inflation hike (Malaysia) and KWSP (EPF) return

I am far from an expert on economic matters. It does impact our commodity prices, equity prices, etc.

A moderate inflation level at ~2 to 3% is healthy or normal based on statistical data, to drive economic consumption and is crucial for economic growth. However, the sudden drop in inflation below <2% indicates a financial crisis of some sort which is opposite to inflation is deflation.

Deflation can be seen as a bad sign for the economy that may lead to ballooning debt which is dangerous for a country. Malaysia’s significant historical are as follows: -

1. The commodities shock in 1985/86 at the lowest inflation from the normal inflation at ~4% in 1984 down to 0.34% in 1985 and 0.29% in 1987 when citizens had a tough time seeking a job while Malaysia entered into recession. The event was triggered by the U.S. high-interest rate policy, resulting in global commodity trade collapsing. The event was known for the Volker shock.
2. Asian financial crisis of 1997/98. In July 1997, within days of the Thai baht devaluation, the ringgit shrunk by 50% when the overnight rate jumped from 8% to over 40% which led to rating downgrades causing large sell-offs on the stock and currency market. One principal measure was to fix the exchange rate pegging the ringgit at 3.80 to the dollar from a free float. In the subsequent years, the inflation shrunk to 2.73% (1999) from a high of 5.29% (1998).
3. Malaysia’s Global financial crisis of 2008/09 was of a different kind when the U.S. Lehman Brothers/Bear Sterns bankruptcy and banks system collapsed leaving financial institutions with trillions of dollars in subprime mortgage investments spiraling to market drops across the board. The story was chronicled in the Big Short 2015 movie when a group of investors profited from bets against the U.S. mortgage market crisis in 2006–2007. Malaysia’s domestic economy fell into recession in the ensuing year in 2009 with inflation of 0.6%. Before this in 2008, the economy was robust with inflation peaking at 5.4% in the previous year.

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The Edge article summarized the above three events which shrunk inflation from the average of 2–3% to <1%. Studying history helps us understand how events in the past extrapolate onto the present and future.

Statista: Malaysia inflation rate from 1987 to 2028

COVID-19 was unprecedented in history, we see a reduction in inflation down to negative -1.14% territory and reduced economic activity for the first time in 2020 in the last multiple decades when shops, hawkers, and food stalls were forced to close down due to the avian pandemic and low economic activity. In the subsequent years, inflation soars back to 3.38% although, analysts still think it is within the range standard at a tad upper range.

Chief statistician Datuk Seri Mohd Uzir Mahidin said the increment was driven mainly by food and beverages (5.8 per cent), restaurants and hotels (5.0 per cent), transport (4.7 per cent), and furnishings, household equipment and routine household maintenance (3.5 per cent).

Malaysia’s inflation is determined by a CPI basket of twelve goods. The inflation forecast is expected to cool down the inflation to a ~2.5% level in 2025 based on the Statista chart above.

How CPI was computed?? I was baffled by economic numbers perhaps this link might guide us on how to compute this number: aggregate price levels to measure the purchasing price…

KWSP

Despite the COVID-19 crisis and negative inflation, KWSP was still able to generate a steady dividend return of 5.2% in 2020. However, at a lower dividend rate (see my previous blog about KWSP return).

Since 2013 to 2022

Num of years 10 (2013, 6.35%) (2014, 6.75%) (2015, 6.40%) (2016, 5.70%) (2017, 6.90%) (2018, 6.15%) (2019, 5.45%) (2020, 5.20%) (2021, 6.10%) (2022, 5.35%) CAGR 4.84% Number of multiple 1.6x (assuming initial investment plus dividend to be retained/reinvested)

KWSP dividend vs inflation hike (2013–2022) and negative hike in the yellow box

KWSP returns minus inflation approximating to 1.4x (dividend minus inflation = 1.6 minuses ~1.2) multiple in the last 10 years indicating KWSP can overcome inflation in the longer term despite the current interest rate environment.

Past decades

FRED: Inflation, consumer prices for Malaysia

In the longer past decades, inflation had been tiptoeing in 1961, 1964–65, and 1968–69, with minor negative inflation of ~0% (in case you could help me to recall the historical event in the 60s?).

Continuing to the 70s, inflation hiked from 3.2% (1972) to 10% (in 1973) and 17% (in 1974) at the historical peak due to the OPEC oil embargo crisis which is unheard of in modern times. In the subsequent years, in 1980 and 1981 rose again stopping at a near peak at ~10%.

KWSP dividend/inflation since 1960 and unusual negative hike in the yellow box

Overall, KWSP returns minus inflation approximating at 3.25x multiple in 63 years.

Summary

Malaysia’s average inflation from 1987 to date amounted to about 2.43% including projections up to 2028 based on Statista data (preceding figure). U.S. comparable inflation was ~2.2%. Long-term average inflation from 1960 to 2022 is higher at 3.0% including the unusual events preceding the oil embargo crisis in the 1970s.

Sudden hikes in inflation and high-interest rate can be tough for consumers to cope with rising inflation leading to reduced purchasing power to consumers, eroding real income as the single biggest cost of inflation.

Companies will have to raise the selling price, service fee hike, and cost-cutting to reduce expenses, differentiate the products, and multiple strategies to cope with the inflated prices.

Overall inflation of less than 1.5% or above 2.5% based on past statistical data, at an average of ~10 years sampled since 1985 which signals inflation monetary officers to kick in to moderate inflation level.