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.