Inflationary pressures

Inflationary pressures

Over the last few months, President Soeharto has been
instructing his ministers to coordinate concerted efforts to curb
price increases in general. In fact, anti-inflation measures have
been one of the highest priority items on the agenda of the
monthly limited cabinet sessions on economic affairs since early
this year.

Nonetheless, the latest monthly figure for the consumer price
index, as announced after the limited cabinet meeting on
Wednesday, is causing a great concern. The inflation last month
rose again to 0.89 percent from 0.53 percent in September,
thereby bringing the cumulative inflation during the first 10
months of this year to 8.27 percent.

Many might find some consolation in that the figure was still
slightly lower than the 8.77 percent cumulative inflation in the
corresponding period of last year. But the comparison is actually
not fair because the biggest cause of inflationary pressures last
year -- the almost 30 percent increase in fuel prices that
triggered price rises in almost all other sectors -- does not
exist this year.

Therefore, extra caution is needed to check inflation at a
single-digit level for the whole year, especially in view of the
7.68 percent increase in the electricity rates as of this month
and the Christmas and New Year holidays next month. Assuming that
the government could contain the impact of the electricity price
rise, the inflation for the whole year could yet be checked below
10 percent, but would be in the higher range of the single-digit
level, or about the same level as last year's 9.77 percent.

The inflationary pressures this year have been caused mainly
by the rising costs of the food and housing components (cement)
of the consumer price index. Regrettably the higher costs of the
two components have not been generated by real supply shortages,
but rather by distribution problems. That means that the
inflationary pressures could have been reduced through better
coordinated efforts by the various related ministries.

The rice price increase actually had been foreseen last year
as the dry season this year was forecast to be much longer than
usual. But the impact could have been minimized with better stock
management, especially because rice production was estimated to
decline by less than four percent this year.

Extreme lack of coordination in managing cement stocks for
domestic consumption and exports seems to have been mainly
responsible for the steep rise in cement prices since July.

Many officials or greedy businessmen may not fully realize
that inflation is bad for everybody. It unsettles economic
assumptions in the marketplace, making people uncertain about the
future and prompting them to become short-sighted instead of
thinking in terms of long-time horizons. Further down the road,
high inflation accelerates the rate of rupiah depreciation, thus
encouraging people to use their money in speculative activities.
High inflation punishes savers and rewards debtors.

High inflationary pressures also are inimical to sound
business. High inflation makes it extremely difficult to plan
business operations as there is a high degree of uncertainty
about the future prices of input and output, bank interest rates
and foreign exchange rates.

Hence, President Soeharto's instruction on the anti-inflation
measures is crucial for promoting sound economic growth because
low inflation makes changes in prices much more transparent to
both consumers and businesses. Therefore it is imperative for all
businessmen, as the suppliers, and officials, who are responsible
for facilitating services and providing and maintaining the
infrastructure needed for a smooth distribution system, to better
coordinate their efforts.