KUALA LUMPUR (Nov 9): While Malaysia’s inflation rate has moderated, the easing trend does not necessarily translate into a lower cost of living for households, highlighting the difference between changes in consumer prices and the actual affordability of everyday necessities.

The Consumer Price Index (CPI), the country’s primary measure of inflation, tracks the average change in prices of a representative basket of goods and services. However, it does not necessarily capture the different spending patterns, income levels and financial commitments of individual households.

This may be why Malaysians still feel financially stretched even when official inflation figures indicate that price increases are slowing.

In its article “Beyond the Headline: Inflation through the Eyes of Households”, published in its Annual Report 2025 earlier this year, Bank Negara Malaysia (BNM) explained that inflation measures the rate at which prices increase, rather than how high prices have already become.

It said Malaysia's headline inflation averaged 1.4% in 2025, its lowest level in five years, but the central bank acknowledged that the high cost of living remained a major concern for many households.

Inflation averaged 1.8% in the first nine months of 2026, with core inflation at 2%.

BNM said the difference is partly attributed to the way households experience price changes, particularly through frequently purchased items such as food and beverages, which tend to have a stronger influence on their perception of inflation.

It cited two behavioural factors influencing household perceptions, namely frequency bias, where staple foods and beverages are regularly purchased and carry greater weight in people's assessments of price changes.

To better reflect this experience, economists use indicators such as the Everyday Price Index (EPI), which assigns greater weight to frequently purchased items in the CPI. 

By emphasising these regular purchases, BNM said the EPI captures price changes that more closely mirror households’ day-to-day experiences.

It said household perceptions are also shaped by how people remember price changes. 

“Price increases tend to leave a stronger and more lasting impression than price declines, even when both occur. This behavioural pattern, known as memory bias, is captured in the Perceived Price Index (PePI).”

The PePI is similar to the EPI but includes only items that have recorded price increases, while excluding those that have fallen in price. As a result, the PePI often shows a higher inflation rate than both the CPI and the EPI, reflecting the stronger impression that price hikes leave on households.

The central bank said that beyond measuring inflation, the more fundamental issue is whether household incomes are growing enough to keep pace with the cumulative increase in prices.

Analysis by BNM showed that between 2019 and 2024, Malaysia’s headline CPI rose 9.3%, while nominal wages per worker grew by only 7.2%.

“In other words, this means that the average person must work more hours to afford the same basket of goods. This is clearly illustrated in the case of food. As prices rose faster than wages in recent years, households must now work longer just to meet their usual food expenses,” it said.

As the central bank, one of BNM’s key objectives is to ensure low and stable inflation. 

“This is important as stable and predictable prices allow households and businesses to better plan their spending, saving and investment decisions. In turn, this helps to support economic activity and growth.

“Preserving household purchasing power, however, depends not only on prices but also on incomes; namely, when price increases are slow and predictable, households can maintain their purchasing power as long as wages rise alongside prices,” it elaborated.

In such conditions, BNM said steady inflation allows incomes time to adjust, helping households cope with higher prices and plan their spending with greater confidence.

It said recent income measures, such as revisions to the minimum wage, have helped to ease the burden on more than five million workers in Malaysia. Over the longer term, however, deeper structural reforms are needed to address the root causes of subdued wage growth in Malaysia.

“First, there is a need to create more high-skilled and high-paying jobs. In 2025, high-skilled jobs made up only 26% of new positions, lower than the five-year (2020–2024) average of 30%,” it said.

BNM said this reflects the need to accelerate Malaysia’s transition towards higher value-added industries, strengthen technology adoption and increase investment in research and development to generate better-paying employment opportunities.

In this vein, initiatives such as the National Industrial Masterplan (NIMP2030) and the National Investment Aspirations (NIA) aim to attract higher-quality investments, promote technology-intensive production and generate more high-skilled jobs.

While maintaining low and stable inflation remains important, addressing the cost-of-living challenge requires a broader policy response that tackles both household expenditure and income growth, it said.

“Monetary policy alone cannot fully preserve purchasing power, as households’ wellbeing is also shaped by wage growth, productivity and broader cost of living trends.”

“Even with moderate inflation, many households continue to grapple with higher living costs amid slow wage growth,” said the central bank.

BNM said income growth needs to outpace price increases to secure better living standards and strengthen purchasing power.

It added that when expenses rise faster than incomes, even small price increases can feel significant to households, shaping how affordable things seem and how they view the broader economy.

“Ultimately, strengthening households’ purchasing power requires a holistic and coordinated policy strategy,” it said.

The government’s efforts to raise wages, including the recent increase in the minimum wage to RM2,000 in the Budget 2027 from RM1,700, provide some relief to workers. However, sustained improvements in living standards would depend on broader wage and productivity growth.

The new minimum wage is set to take effect in June 2027 and will benefit more than four million workers.

In its report, BNM said this entails complementing monetary policy with targeted fiscal support for vulnerable groups and implementing structural reforms that boost incomes and productivity.

In Budget 2027, Sumbangan Asas Rahmah (Sara) aid has been extended to nearly 13 million Malaysians, including the M40 group.

As of Oct 22, RM3.6 billion had been disbursed to Sumbangan Tunai Rahmah (STR) cash aid recipients through three payment phases. In total, nearly RM12 billion in STR and Sara assistance had been channelled to eligible recipients. 

The allocation for STR and Sara would be increased to RM16 billion in 2027, with monthly Sara assistance raised to RM150, or RM1,800 annually.

“By tackling both price and wage dynamics, policymakers can safeguard purchasing power and support sustainable economic growth over the long term,” said BNM.

Hence, while a lower inflation rate may indicate that price increases are becoming more manageable, the central bank added that meaningful improvements in living standards will only be felt when household incomes grow sufficiently to restore and strengthen purchasing power.

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