Inflation, an elusive concept to most people

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
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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.