The rising Cost of Living is eroding a family’s ability to spend. Urban middle-class households face higher living costs, with incomes barely covering essentials in cities like Kuala Lumpur or Johor Bahru. For example, an M40 household earning RM7,000/month may struggle in urban areas due to high housing, education, and healthcare costs.

Many M40 households face “lifestyle inflation,” juggling rising costs and family obligations, such as supporting B40 relatives. A single financial shock, like a medical bill or job loss, can push these households toward financial instability, as they often lack a sufficient savings buffer. This is especially the case after the Covid era, where many families and proprietors of MSMEs are still facing debt repayments. M40 households are facing rising costs inhibiting their ability to save for when they need money to cover unexpected expenses. The relative ease that M40 households can obtain credit cards has played a role in pushing them into a debt lifestyle. The bottom line is households are not saving, they are paying off debt instead.

One of the major challenges to the Malaysian economy today are stagnant wages. Despite Malaysia’s economic growth (projected at 4–4.8% in 2025), wage growth lags behind inflation and productivity gains. The benefits of economic growth are not being passed onto M40 households. The middle class, particularly young graduates, struggles to find high-skilled jobs, with 42% of late primary-school children showing poor learning outcomes, limiting future workforce competitiveness. This compounds financial strain as aspirations for upward mobility and thus higher wages are unmet.

Malaysia has not been immune to pressure on the Ringgit. The ringgit’s volatility, despite a 0.8% appreciation against the US dollar in Q1 2025, increases costs for imported goods, which hit urban middle-class households harder due to their consumption patterns. Global trade tensions and higher shipping costs (e.g., due to Red Sea disruptions) further drive-up prices, squeezing budgets. The rise of the cost of goods in many categories is greater than the official inflation rate.

Malaysia has fallen victim to the “Middle Income Trap”, where middleclass families are unable to transition into the upper-middle class. This is partly a result of stagnant productivity and the failure of corporations to more equally share their profits to their respective labour forces.

While the government has been focusing on programs for the poor, the middle class feels pinched by policies that disproportionately affect their disposable income and limited safety nets. The government’s income classification system is not picking up this problem (or politicians are ignoring it). Malaysia’s statistical system needs an overhaul to better reflect regional cost-of-living differences and multidimensional poverty. The B40-M40-T20 classification system fails to account for these disparities, leaving urban M40 households feeling squeezed.

As a result, many families have been forced to curtail spending decisions. This means deferring holidays, going out less for dinner, wearing old clothes for longer, not buying consumables, and even cutting down on the food they buy outside the house. Come the end of 2025 and into 2026, aggregate household spending will no longer be a major driver of the economy.

With pensions not rising according to the Consumer Price Index (CPI), tolls rising, more taxes coming, and living costs rising, the middleclass is being squeezed. This is happening at the same time the T20 is getting a ‘free ride’ from the government. Taxes on the T20 have not risen proportionally to the middleclass.

Politically, the middleclass is a powerful voting cohort for Pakatan Harapan. Pakatan relies on the middleclass vote in urban areas, where it holds many of its seats. Failure to address the above problem will logically cost Pakatan dearly in the seats it holds.

The government still has three annual budgets to address this mostly unidentified issue. Overlooking the middleclass will be an electoral disaster. Budget 2026 needs to be a budget for the middleclass to get them back onboard and maintain a robust economy in 2026.