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)