FACULTY OF ECONOMICS AND BUSINESS

EBE2164 RESEARCH METHODOLOGY FOR ECONOMICS AND BUSINESS (G04)

SEMESTER 2 SESSION 2022/2023

FINAL ASSESSMENT
TITLE: RELATIONSHIP BETWEEN INFLATION AND CONSUMER SPENDING

NAME: NAJAA SOFIA ALIAH BINTI HARISIN

MATRIC NO: 80325
LECTURER: SIR BAKRI BIN ABDUL KARIM
1.0 Introduction

1.1 Background of study

The rate at which prices increase over a specific time period is known as inflation.
Inflation is often measured in broad terms such as the general rise in prices or the rise
in a nation's cost of living. However, it can also be computed more precisely for some
products such as food or services, like getting a haircut. Inflation, regardless in any
context, defined as the increase in price of the relevant set of products or services over
a specific time period, typically once a year. Moving on, consumer spending is crucial
to businesses. The more money consumers spend at a certain company, the better that
company performs. Because of this, it is not unexpected that the majority of investors
and companies pay close attention to data on consumer purchasing trends. Inflation
reduces the amount of goods and services that a given amount of money can buy
compared to when there is no inflation. Consumers' ability to buy things has decreased
as a result of the sharp decline in the real worth of money. According to Katona (1975),
inflation has direct and indirect impact on consumer consumption. However, inflation
impact on consumer spending patterns is not very popular as much as the impact of
income on consumer spending in both theoretically or empirically.

1.2 Research problem

The study addressed the information gap and assessed the theories regarding the effects
of the inflation rate on consumer spending and unemployment. Consumer spending
expenditures are indicators of how much money people spend on purchasing various
goods and services. It helps in getting a sense of how much money one willing to pay
on various goods and services. Since it plays a significant role in economic growth, it
is crucial to understand how inflation affects it because certain inflation policies may
have negative impacts depending on the time period (Olusola, Chimezie, Shuuya &
Addeh, 2022). This research aims to conduct the variables in order to provide a clear
picture of their relationships and to suggest potential ways of sustaining these variables
to accomplish high economic growth rates needed for the country to meet its goals.
 1.3 Objectives

There are two main objectives to conduct this research. Firstly, it is to identifies how
strong the relationship between inflation and consumer spending and also to identified
whether the rising or declining of inflation has a linear relationship with consumer
spending in Malaysia from 1991 to 2021.

1.4 Significance of study

1. Providing the needed information to make people understand it better on how

inflation can impact consumer spending and somehow reflecting in the standard of
living.
2. Make contributions to existing literature by giving a more detailed information on
the relationship between inflation and consumer spending in Malaysia
3. Contribute knowledge in academic as it can serve as a foundation or references for
further studies into the same matter.

2.0 Data and methodology

2.1 Variables and methods

In this study, we considered inflation rate as dependent variable and consumer spending
growth rate as independent variable, where:

Inflation rate: It enables us to determine how much the cost of goods and services has
climbed over the past year in a given economy.
Consumer spending growth rate: Consumer spending or also known as personal
consumption expenditures (PCE).
 EViews 12 student version of statistical software was chosen to help examining the
relations between the variables in this study. In addition, a mixed method, both
descriptive statistics and inferential statistics were used to get reliable and solid results.

2.2 Data collection

This study applies data starting from 1991 until 2021. The empirical data regarding
inflation rate and consumer spending growth rate in Malaysia used in this study were
all retrieved from Macro Trends website. Later, the results will be presented along with
discussions of the findings from the empirical analyses performed.

2.3 Research hypothesis

Researchers has formulated two research hypothesis in line with this study, which are:

H0 = There is a significant relationship between inflation and consumer spending

H1 = There is no significant relationship between inflation and consumer spending

3.0 Results

3.1 Descriptive statistics

Inflation rate Consumer

spending
Mean 2.534194 6.016774
Median 2.480000 6.870000
Maximum 5.440000 13.03000
Minimum -1.140000 -10.24000
Std. Dev. 1.466474 4.543730
Skewness -0.067678 -1.753278
Kurtosis 2.976967 7.002712

Jarque-Bera 0.024351 36.57696

Probability 0.987899 0.000000

Sum 78.56000 186.5200

Sum Sq. Dev 64.51635 619.3645
 Observations 31 31

Based from the table, the skewness value of -0.067678, and -1.753278 for inflation and consumer
spending respectively shows that some of the variables of the dataset skewed to the right, while
others are skewed to the left indicates that the dataset is not normally distributed. Kurtosis for
inflation is 2.976967 means it is not normally distributed as the values are below the normally
distribution value of 3.

3.2 Unit root test

Level 1st Difference

Train and P-Value Intercept P-Value Train and P-Value Intercept P-Value
Intercept intercept
LIR 23.1943 0.0001 25.5381 0.0000 55.1726 0.0000 44.8616 0.0000

LCS 22.1239 0.0002 24.1997 0.0001 322.223 0.0000 67.9351 0.0000

Based from the table, level difference shows the p-value of 0.0001 and 0.0002 for both variables
while p-value in first difference shows as 0.0000 for both variables. This indicates that we reject
the null hypothesis as the p-value is lower than the significance level 0.05. This also means that
the data has no unit root and is stationary.

3.3 Cointegration test – Johansen

Unrestricted Cointegration Rank Test (Trace)

Hypothesis Eigenvalue
Trace 0.05 Critical P-Value
Statistic Value
None* 0.470095 24.39218 15.49471 0.0018
At most 1 0.186210 5.975534 3.841465 0.0145
Unrestricted Cointegration Rank Test (Maximum Eigenvalue)
 Hypothesis Eigenvalue Max-Eiqen 0.05 Critical P-Value
Statistic Value
None* 0.470095 18.41665 14.26460 0.0104
At most 1 0.186210 5.975534 3.841465 0.145

The cointegration results for the relationship between inflation and consumer spending indicates
inflation is not statistically significant indicated by its probability value 0.0018 and 0.0145.
Therefore, we assume increase in inflation would decrease consumer spending.

3.4 Granger causality test

Null Hypothesis F-Statistic P-Value Decision

CONSUMER_SPENDING does not Granger Cause 0.15515 0.8571 Accept

INFLATION_RATE
INFLATION_RATE does not Granger Cause 0.42088 0.6612 Accept
CONSUMER_SPENDING

Granger causality test results are depicted in table 4. Results revealed that there is causation
between inflation and consumer spending in Malaysia. The F -statistics values are less than 2 which
indicates that the hypothesis has no causation between the variables are rejected. The probability
0.8571 and 0.6612 indicates that inflation granger cause consumer spending and consumer
spending granger cause inflation, therefore the two null hypothesis are rejected.

4.0 Result interpretation and discussion

The main objective of this study is to establish and explain the empirical relationship between
inflation and consumer spending in Malaysia. From this study, we can assume that the
inflation’s effect on consumer spending is driven by the economic consequences of inflation.
The aims for this study was to look at how inflation can have an impact on private consumption
expenditure in Malaysia from 1991 to 2021. Data collected were sourced from the Macro
Trends with 30 sample size. Descriptive statistics were used to calculate the mean, standard
deviation and kurtosis. Granger causality test was used to test for causality between the
 variables, while the unit root test used for stationarity and cointegration test for long term
variables testing. The study talked about the literature gap and conducted a test on the
hypothesis regarding the impact of the inflation on consumer spending.

5.0 Summary and implication of study

In conclusion, inflation arises from a rise in price levels through the transmission mechanism,
and thus lowers consumer spending. Increasing inflation may also increase the uncertainty
surrounding it and decrease consumption via a channel for precautionary saving. When
introducing anti-inflationary measures, as well as the existing value-added tax in the
Malaysia’s economy, where direct competition exists, the government should consider
employee purchasing power or income in order to prevent a social and economic disaster
happening. Moreover, value-added tax rates that are too high will hurt businesses' ability to
grow and exporters' ability to compete on price, which then will have a detrimental effect on
consumer spending.
References

Investopedia Team. (2021). Consumer Spending: Definition, Measurement and Importance.

Investopedia. https://www.investopedia.com/terms/c/consumer-spending.asp

Macro Trends. (n.d). Malaysia Consumer Spending 1960-2023.Retrieved on June 28, 2023 from

https://www.macrotrends.net/countries/MYS/malaysia/consumer-spending

Macro Trends. (n.d). Malaysia Inflation Rate 1960-2023. Retrieved on June 28, 2023 from

https://www.macrotrends.net/countries/MYS/malaysia/inflation-rate-cpi

Olusola, Chimezie, Shuuya & Addeh. (2022). The Impact of Inflation Rate on Private

Consumption Expenditure and Economic Growth – Evidence from Ghana.

https://www.scirp.org/journal/paperinformation.aspx?paperid=117726

Appendices

INFLATION... CONSUME...
Mean 2.534194 6.016774
Median 2.480000 6.870000
Maximum 5.440000 13.03000
Minimum -1.140000 -10.24000
Std. Dev. 1.466474 4.543730
Skewness -0.067678 -1.753278
Kurtosis 2.976967 7.002712

Jarque-Bera 0.024351 36.57696

Probability 0.987899 0.000000

Sum 78.56000 186.5200

Sum Sq. Dev. 64.51635 619.3645

Observations 31 31
Group unit root test: Summary
Series: INFLATION_RATE, CONSUMER_SPENDING
Date: 06/30/23 Time: 18:57
Sample: 1991 2021
Exogenous variables: Individual effects, individual linear trends
Automatic selection of maximum lags
Automatic lag length selection based on SIC: 0 to 1
Newey-West automatic bandwidth selection and Bartlett kernel

Cross-
Method Statistic Prob.** sections Obs
Null: Unit root (assumes common unit root process)
Levin, Lin & Chu t* -4.82057 0.0000 2 59
Breitung t-stat -3.11806 0.0009 2 57

Null: Unit root (assumes individual unit root process)

Im, Pesaran and Shin W-stat -4.39088 0.0000 2 59
ADF - Fisher Chi-square 23.1943 0.0001 2 59
PP - Fisher Chi-square 22.1239 0.0002 2 60

** Probabilities for Fisher tests are computed using an asymptotic Chi

-square distribution. All other tests assume asymptotic normality.

Group unit root test: Summary

Series: INFLATION_RATE, CONSUMER_SPENDING
Date: 06/30/23 Time: 18:57
Sample: 1991 2021
Exogenous variables: Individual effects
Automatic selection of maximum lags
Automatic lag length selection based on SIC: 0 to 1
Newey-West automatic bandwidth selection and Bartlett kernel

Cross-
Method Statistic Prob.** sections Obs
Null: Unit root (assumes common unit root process)
Levin, Lin & Chu t* -4.92059 0.0000 2 59

Null: Unit root (assumes individual unit root process)

Im, Pesaran and Shin W-stat -4.49643 0.0000 2 59
ADF - Fisher Chi-square 25.5381 0.0000 2 59
PP - Fisher Chi-square 24.1997 0.0001 2 60

** Probabilities for Fisher tests are computed using an asymptotic Chi

-square distribution. All other tests assume asymptotic normality.
Group unit root test: Summary
Series: INFLATION_RATE, CONSUMER_SPENDING
Date: 06/30/23 Time: 18:55
Sample: 1991 2021
Exogenous variables: Individual effects, individual linear trends
Automatic selection of maximum lags
Automatic lag length selection based on SIC: 0 to 1
Newey-West automatic bandwidth selection and Bartlett kernel

Cross-
Method Statistic Prob.** sections Obs
Null: Unit root (assumes common unit root process)
Levin, Lin & Chu t* -7.38045 0.0000 2 57
Breitung t-stat -3.15690 0.0008 2 55

Null: Unit root (assumes individual unit root process)

Im, Pesaran and Shin W-stat -9.01921 0.0000 2 57
ADF - Fisher Chi-square 55.1726 0.0000 2 57
PP - Fisher Chi-square 322.223 0.0000 2 58

** Probabilities for Fisher tests are computed using an asymptotic Chi

-square distribution. All other tests assume asymptotic normality.

Group unit root test: Summary

Series: INFLATION_RATE, CONSUMER_SPENDING
Date: 06/30/23 Time: 18:56
Sample: 1991 2021
Exogenous variables: Individual effects
Automatic selection of maximum lags
Automatic lag length selection based on SIC: 1
Newey-West automatic bandwidth selection and Bartlett kernel
Balanced observations for each test

Cross-
Method Statistic Prob.** sections Obs
Null: Unit root (assumes common unit root process)
Levin, Lin & Chu t* -4.66651 0.0000 2 56

Null: Unit root (assumes individual unit root process)

Im, Pesaran and Shin W-stat -7.39662 0.0000 2 56
ADF - Fisher Chi-square 44.8616 0.0000 2 56
PP - Fisher Chi-square 67.9351 0.0000 2 58

** Probabilities for Fisher tests are computed using an asymptotic Chi

-square distribution. All other tests assume asymptotic normality.
Date: 06/30/23 Time: 18:49
Sample (adjusted): 1993 2021
Included observations: 29 after adjustments
Trend assumption: Linear deterministic trend
Series: INFLATION_RATE CONSUMER_SPENDING
Lags interval (in first differences): 1 to 1

Unrestricted Cointegration Rank Test (Trace)

Hypothesized Trace 0.05

No. of CE(s) Eigenvalue Statistic Critical Value Prob.**

None * 0.470095 24.39218 15.49471 0.0018

At most 1 * 0.186210 5.975534 3.841465 0.0145

Trace test indicates 2 cointegrating eqn(s) at the 0.05 level

* denotes rejection of the hypothesis at the 0.05 level
**MacKinnon-Haug-Michelis (1999) p-values

Unrestricted Cointegration Rank Test (Maximum Eigenvalue)

Hypothesized Max-Eigen 0.05

No. of CE(s) Eigenvalue Statistic Critical Value Prob.**

None * 0.470095 18.41665 14.26460 0.0104

At most 1 * 0.186210 5.975534 3.841465 0.0145

Max-eigenvalue test indicates 2 cointegrating eqn(s) at the 0.05 level

* denotes rejection of the hypothesis at the 0.05 level
**MacKinnon-Haug-Michelis (1999) p-values

Unrestricted Cointegrating Coefficients (normalized by b'*S11*b=I):

INFLATION_... CONSUMER_SPENDING
-0.352831 0.279673
0.842129 0.146090

Unrestricted Adjustment Coefficients (alpha):

D(INFLATION... 0.452103 -0.592618

D(CONSUM... -3.634799 -0.710212

1 Cointegrating Equation(s): Log likelihood -134.6904

Normalized cointegrating coefficients (standard error in parentheses)

INFLATION_... CONSUMER_SPENDING
1.000000 -0.792656
(0.18921)

Adjustment coefficients (standard error in parentheses)

D(INFLATION... -0.159516
(0.10266)
D(CONSUM... 1.282469
(0.29605)
Pairwise Granger Causality Tests
Date: 06/30/23 Time: 18:53
Sample: 1991 2021
Lags: 2

Null Hypothesis: Obs F-Statistic Prob.

CONSUMER_SPENDING does not Granger Cause INFLATION_RATE 29 0.15515 0.8571

INFLATION_RATE does not Granger Cause CONSUMER_SPENDING 0.42088 0.6612