- the oil price hike
- the reduction in petrol subsidy
- the increase in food prices
- the increase in transportation costs
- and finally the increase in a basket of consumer goods
Assume that our spending power, on average, is 1 unit of each good.
Income disparities between individuals are not taken into consideration because each income group has their own basket of consumer goods.
This means that higher income groups will perhaps buy free range poultry, eat in quality restaurants, purchase higher priced clothes and drive bigger cars that consume more petrol.
On the other hand, the middle income groups will perhaps buy caged poultry, eat in normal food courts, purchase reasonably priced garments and drive a lower cc car.
The basket of goods measured is the same and given their respective incomes, we take their spending power as 1 unit of each good in the basket.
Over the time period of an increase in the listed sequence of 5 events above, our spending power per unit of goods in the basket has fallen to, say 0.5 units of each good.
That is, assuming we maintain all wages, taxation, and EPF contributions. Realistically, that is not true. In fact we have a case where
- income per month can possibly increase with bonuses, contractual wage increase, and non labor income
- taxes have fallen in Malaysia in a “caring budget” by Pak Lah
With these “safety nets” handed out to the people, our purchasing power of the basket of good can possibly increase to say, 0.7.
And now, we have Najib handing out candies to the work force - EPF contributions can be slashed to 8% from (optional) in a “stimulus package” by Najib.
This can probably make us well off with a purchasing power of greater than 0.7 per unit of the goods in the basket.
That is the side of the consumers. Let us move to the producers.
Producers that sell above costs are said to be earning supernormal profits. I will term it as extraordinary profits.
A plate of rice that sold for RM 5 after a petrol price hike should only be sold now at say, RM 4 since the lower revised petrol price. But food prices stayed the same!
If the people are still pressured by their lower spending power, we will spend every dollar wisely.
Consumers and producers will sort themselves out in equilibrium. Similar goods producers will have to differentiate their products, innovate and create as well as subscribing to price wars to win consumers’ dollars.
With the option to reduce EPF contributions to 8%, the people will surely have more dollars to keep themselves at the spending power before the oil price hike or just slightly worse off.
This will surely keep the demands of consumers still “carefree” and maintained at their “habitual” level.
Demands by consumers, unchanged and reasonably unaffected by prices now, will allow producers to continue earning “abnormal profits”.
The prices of goods will be sustained to be brought forward to the future period.
Do not forget also that year after year, food prices – especially the Chinese traders – will rise to see the Sun but never slashed to see the Earth.
Annual inflation will also be factored into their pricing strategies.
We can expect the prices in future to be higher than what it is now because producers will not compete to provide efficiently and at socially optimal levels to consumers – i.e. disequilibrium.
Upon retirement, we will have 3% lesser EPF savings. But 3% is not the real value forgone because we have to take into account the percentage of dividends given out annually by EPF discounted at the inflation rate. We must also not forget we can earn dividends on dividends.
This move will not be beneficial for us in the future. Unless of course, we take the 3% away to invest in stocks, insurances, currency holdings or any financial assets that will ensure returns greater than EPF dividend rates.
Otherwise, the 3% cut might not do us any good in the long run. At least, that is what I think on the surface, without going in depth to consider the intertemporal budget constraints and utility maximizations of each unique individual.
Personally, for now with a shallow thought, I disagree with the option to take up the 3% EPF contribution cut.
Thankfully, though, Najib proposed that this scheme is to be enforced for two years only (i.e. temporary policy) beginning from Jan 1 next year. So, the effects on EPF savings might not be great.
Perhaps the Government is right that if all contributors take the cut, it will boost private spending by RM 4.8 billion a year and money circulation in the economy will help maintain our markets.
But again, I am looking at the “reluctance” of the traders to reduce their prices even after the petrol price hike.
A spending power pressure on consumers will certainly be a winner for us because traders of food or raw materials have no choice but to slash their prices to near competitive equilibrium prices to win market share.
This is just me in my own world doing some surface thinking.