Inflation, an elusive concept to most people

Endy M. Bayuni, Jakarta

When the Central Bureau of Statistics (BPS) announced the latest inflation figures on Tuesday, most government officials and some economists professed surprise and shock.

While many had predicted that inflation, which is officially defined as the rate of increase in the consumer price index, would be high in the wake of the massive hikes in domestic fuel prices at the start of October, no one had foreseen that it would reach 8.70 percent for the month, and thus taking the year-on- year inflation to 17.89 percent.

Certainly, most of us could have been prepared for that high inflation rate. Even President Susilo Bambang Yudhoyono, like the rest of the nation, had been led to believe by his chief economics minister Aburizal Bakrie that inflation would still be held in check at 12 percent for the whole of 2005. A week before the announcement, Aburizal had dismissed a Bank Indonesia prediction that inflation in 2005 would reach 14 percent. Both of them, as the latest BPS figures show, turned out to be optimistic.

But ordinary people, to whom inflation also means the increases in prices of goods and services, the news did not come as a shock. If anything, many were surprised, or even suspicious, that it was not as high as their own perceived "inflation" had become.

"Surely, it's more than that," was the typical reaction of the few people in the country who still care to listen to the government's monthly statistical announcements.

Why is there so much public apathy to the inflation figure? It appears that there is a huge gap between what the government says with regard to prices of goods and services, and the reality that people find in the markets.

In the wake of this announcement, I asked my wife and my sister-in-law about the prices for basic goods recently. Here is a list of current versus previous prices of a list of food and other things just before the Idul Fitri celebrations:

* Beef Rp 60,000/kg from Rp 44,000. Up by 36 percent

* Chicken Rp 18,000/kg from Rp 12,000. Up by 50 percent

* Red/green chili peppers Rp 45,000/kg from Rp 15,000. Tripled

* Rice Rp 115,000/25kg sack from Rp 90,000. Up by 28 percent

* Kangkung Rp 1,000 for one bunch from Rp 500. Doubled

We could go on, but suffice it to say here that for many housewives, what they regard as inflation almost always surpasses the government's official announcements.

Shoppers' figures are real. They are the prices paid in Mayestik and Ciputat markets, where the laws of supply and demand rule. No one, not even Trade Minister Mari Pangestu can tell them that they are wrong.

Throw in the 87.5 percent increase in Pertamina's Premium gasoline to Rp 4,500 from Rp 2,400 a liter that ordinary city folks have had to pay, and the gap between the prices that people actually pay and the government's number become even more irreconcilable.

This discrepancy occurs because the consumer price index (CPI), calculated by the BPS, is the result of an aggregation of changes in the prices of up to 397 goods and services collected from 45 cities in Indonesia. Each item is given a weight according to its perceived importance in our spending habits.

The movement in the index, whether from month to month, or from one year to another, therefore reflects the inflation as faced by an "average" Indonesian; except that there is no such thing as a typical Indonesian when it comes to spending behavior.

For one, not every one necessarily buys every single one of the 397 things included on the calculation list during that particular month. Before Idul Fitri, much of the spending, for the 88 percent of Muslims here, will go toward food and foodstuffs (the BPS makes a distinction), and less so on other categories. Each family across the archipelago has different spending priorities at different times of the year.

But the categorization still defies the reality in the markets.

--------------------------------------------------------------- Category Inflation --------------------------------------------------------------- General 8.70 Foodstuff 1.78 Processed food, drinks, cigarettes and tobacco 0.57 Housing, water, power, gas and other fuel 1.94 Clothing 0.11 Health 0.04 Education, recreation and sports 0.09 Transportation, communication and financial services 4.17 ---------------------------------------------------------------- Source: Central Bureau of Statistics

What the BPS aggregation process has done is to remove the dramatic increases that many people actually see and feel. Fuel prices, for example, have effectively doubled for most of us, and even tripled for those who use kerosene to cook, but this in no way is reflected in the inflation rate, even when you break it down into its different components (see the accompanying table).

And what about the prices of beef, chicken (even bird flu has failed to lower the prices, because prices went up), rice and vegetables. Again they are not reflected directly in the inflation figure and its components.

The BPS is kind enough to admit that inflation is different from one city to another. Inflation was highest in Lampung at 12.87 percent and lowest in Palu at 3.84 percent. And here we are, all assuming that prices tend to rise faster in conflict areas like Central Sulawesi. Inflation in Jakarta, according to BPS, was lower than the national average at 7.93 percent.

Since BPS collects its data from 45 cities, its inflation figures are urban biased and therefore are even less relevant to the folks in rural areas, where more than half of this country's citizens live.

Yet, in spite of its irrelevance to the lives of most ordinary people in the country, government officials, economists and politicians, as well as the media, continue to place importance on the monthly announcements of the inflation figures.

They are useful tools for the government or its critics, as can be seen from the war of words that broke out immediately after the BPS announced its figures on Tuesday.

The inflation figure, in spite of its shortcomings, remains the best figure available to measure the purchasing power of our rupiah for a basket of goods and services.

And for people on fixed incomes, as well as their employers, the inflation figure is often used as the basis for negotiating salary increases.

If inflation continues to be used as an economic policy target the way it has been, then the BPS must improve the way it collects its data so that its figures reflect the reality that people face. If the government wants the public to participate in fighting inflation, then it must deal with the apathy first by coming up with more credible figures.

It would also help, if, at some stage, the government or somebody at the BPS explained to the public, in layman's language, the meaning of these inflation figures and how they are derived at. It would be even better if the BPS, or Aburizal Bakrie, cared to introduce to us all this mysterious "average Indonesian" for whom these new figures apply.