The Consumer Price Index in Malaysia

The Consumer Price Index (CPI) is designed to provide a broad measure of changes in retail prices experienced by Malaysian households as a group and should not be expected to exactly reflect the experience of any individual household. Laspeyres formula is used for calculating the index which is based on items that are locally consumed reflecting the spending habits of the average Malaysian. Thus the CPI is seen as a general indicator of the change in retail prices paid by households for goods and services. It is most widely used indicator of inflation for consumption expenditure. CPI measures the changes in the general level of prices of a fixed basket of goods and services which represents the items which are normally consumed by an average household in Malaysia with reference to the base period. The CPI basket includes those goods and services which are important in terms of the size of the expenditures made by Malaysian households. It is neither practical, nor necessary, to include all the items that consumers buy since many items show similar price changes. Hence, by selecting representative items (or samples) carefully, it is possible for the index to reflect price changes for a much wider range of goods than just those observed directly. The Weight of an item in the CPI is derived from the expenditure on that item as estimated by the Household Expenditure Survey. This survey provides data on the average expenditure on selected items, such as rice, fresh meat, fresh fruits, bus fare and so on, that were purchased by the selected households during the survey period. The selection of items for inclusion in the fixed basket of goods and services is primarily based on the relative importance of each item to the total household expenditure; the representative ness of the item as a price indicator for similar items in the same category; and its ‘priceability’, that is, unit of quantity, specification and brand can be clearly specified. Items which have relatively