New method to calculate inflation called for

New method to calculate inflation called for

JAKARTA (JP): The government should change its monthly-based
calculation of inflation to a yearly-based method in order to
better reflect the state of Indonesia's economy, a University of
Indonesia economist has recommended.

"In calculating inflation, the government uses a method that
is not commonly used in other countries. It is not consistent
with the system for calculating other indicators," economist
Faisal Basri told a seminar on interest rate policy, organized by
the Center for Information and Development Studies on Friday.

Faisal said that calculations of economic indicators, such as
inflation, are usually done on an annual basis. Export growth in
October 1995, for example, was calculated by comparing it with
that of October 1994. He recommended that inflation for October
1995 should also be calculated by comparing the consumer price
index for that month with the same month in 1994.

"But in fact, the government calculates inflation by comparing
the consumer price index in October 1995 with that of the
previous month in the same year," he said in his paper, Political
Economy of Interest Rates and Inflation.

Using the present monthly system of calculation, the
government measured a 5 percent inflation rate during the January
to September period. Using the system suggested by Faisal,
inflation would have been recorded as 8.3 percent.

While acknowledging that every system of calculation has
strengths and weaknesses, Faisal noted that the yearly system of
calculation would better reflect and had greater relevance to the
Indonesian economic condition.

The monthly-based method of inflation measurement encourages
the government to take a more short-term and pragmatic approach
towards controlling prices, he said. The government's inflation
management steps would also tend to involve direct market
operation or strong restrictions.

He said that inflation also appears to have its own economic
cycle. Prices tend to increase in the lead up to the Idul Fitri,
Christmas and New Year holidays and to decrease in the months
after these holidays.

"By applying the yearly system, we can minimize the consumer
price index fluctuation because we compare two periods that are
similar in characteristics," he said.

He said the inflation rate is furthermore one of several
figures used as a yardstick for decisions about wage increases,
but that such changes usually take more than a year.

Faisal also predicted in his paper that inflation will be much
lower this year than it has been in recent years.

Central Bureau of Statistics Chairman Sugito Suwito forecast
last week that this year's inflation will be between 6 to 7
percent.

But Faisal said: "We need to review the achievement of
lowering the inflation. It may possibly result from an economic
slump rather than from a comprehensive policy. It seems we have
no comprehensive policy for eliminating the causes of high
inflation." (bnt)