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In Bahasa Malaysia (BM): Kenapa harga barang tak turun?

In English: Why the prices of goods are not falling?

For some reason, asking this question in BM has more oomph! Maybe I’m imagining the tone used. Anyway, next time whenever you hear politicians, friends, colleagues, family members or even you complain “kenapa harga barang tak turun?”, ask this question; “kenapa gaji saya tak turun?” In English, why is my income/salary not falling? Stop and reflect on this for a moment.

In general, the prices of goods are calculated using the below formula:   

Prices of Goods = Business Operating Expenses + Profit Margin

Prices of Goods vs Salary

In this equation, salary falls under business operating expenses. If the prices of goods are meant to fall, then naturally we should expect salary to fall as well. Would you like your salary to decrease? I don’t think so. During hard times, most businesses find it easier to lay off staffs compared to requesting employees to agree to a salary reduction. In my last posts, I touched upon briefly my experience going through a salary reduction. It’s not simple and a time-consuming process. The worst part of it, motivation drops, and it affects productivity.

Now, I know some of you will scream “well, businesses can reduce the profit margin?” In some cases, this is true, but in most cases, it is impossible. Cyclical products, such as high-end handphones (I prefer to call it as luxury products) has a higher profit margin, while non-cyclical products such as food, toiletries, cigarettes, and even alcohol have a lower profit margin. Usually, when we complain about prices of goods not falling, we are referring to non-cyclical products.  

Off Topic

You will notice during an economic downturn; most investors will invest in non-cyclical companies. This is known as a defensive strategy. The idea behind this strategy is most people during the economic downturn will not spend money on luxury items, however, they will continue to purchase daily used items. In Malaysia, some of the well-known defensive stocks are Dutch Lady Milk Industries Bhd, British American Tobacco (Malaysia) Bhd and Carlsberg Brewery Malaysia Berhad.

Yes, alcohol and cigarettes are considered as non-cyclical products. Do you think smokers and alcohol drinkers will stop or reduce their intake during an economic downturn?

Continuation

Ok, back to the topic. So now you know why prices don’t fall or fall fast enough. In economics, these prices are known as sticky prices. Once the price of a product is set, it will stick. In terms of our salaries, it is known as sticky wages. There is a higher chance for prices of goods and salaries to stick and increase rather than reducing to a lower value.

Recently, I was reading “The Under-Cover Economists Strikes Back – How to Run or Ruin an Economy”, written by Tim Harford. The author shared the below reasons why prices stick. I’m just summarizing here. His explanation in the book is far more comprehensive.

1. Fairness: In a social context, it always seems selfish and greedy for employers to cut wages. Or we can turn around and say it’s unfair for the employer has to pay more than the going rate.

2. Menu Cost: It costs more for businesses to frequently change the prices of goods on printed advertisements and on supermarket shelves.

3. Coordination problems: Competition between businesses ensure the prices of goods fall at a slower pace. Observing how competitors react to price changes, businesses may not necessarily drop the price drastically unless the competitors do so.

4. Nominal salary vs Real salary: This is really an interesting point but I’m finding it rather hard to summarize. I think I’ll share it on a separate post.

Think of sticky prices the next time you are discussing prices and wages. Kindly ignore what politicians have to say about prices (the whole GST/SST argument). If they really care, they should talk about the depreciation of Malaysian Ringgit and stagnating wages.

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