Simple home economics

The government may have set the 1997 inflation at no more than 11 percent, and forecast that it will rise to 20 percent this year, but ask any housewife in the city and most will almost certainly laugh these figures off. To them, a 40 percent or 50 percent inflation rate is not an unreasonable assumption for these past few months, judging by the way prices have increased.

Housewives may not have the sophistication of statisticians in computing the consumer price index, but they are the ones who go to the market day in, day out and watch, in horror, at the soaring prices. Sporadic protests and riots sparked off by price increases over the past few weeks are symptoms of growing desperation among people facing worsening conditions.

The official inflation rate is an aggregation of the consumer price index in various cities in the country over a certain period of time. It is based on changes in the price of a basket of goods deemed to be "typical" expenditure for the average household. Such aggregation is wrought with weaknesses, although it is still the best indicator for estimating price changes.

Given today's monetary instability, the published inflation rate becomes less relevant than actual changes in market prices. After all, at the end of each day, it is what people paid that counts, rather than what the government states the inflation rate to be.

Rather than further antagonizing consumers with new inflation figures, the government should explain how it intends to deal with the problem. It could at least give some signals of when it hopes to rein in the problem. Any such signal would be far more comforting to people than the latest inflation estimates.

In economists' jargon, this is a cost-push, rather than the usual demand-pull inflation. The latter is caused, in layman's language, when too much money is chasing too few goods. The present inflation is caused chiefly by the sharp depreciation of the rupiah against the dollar, which has worked its way through production costs, and eventually to prices.

Understanding the cause of inflation is important in determining the remedy. Tightening the money supply would work to ease demand-pull inflation, but would be disastrous in a cost- push situation, for it would deny liquidity to an already cash- starved economy.

The plunge in the rupiah exchange rate initially affected the price of imported goods, but it has since worked its way through the rest of the economy. This is due in part to Indonesia's heavy reliance on imported machineries and raw materials in most of its industries. Our textile industry, for example, uses imported cotton; even the traditional and popular tempeh depends on imported soybean.

The rupiah's fall has created anomalies in the local prices of many commodities compared to world prices. Domestic fuel consumption is now heavily subsidized by the government; were it not for a government export ban, cooking oil manufacturers would choose to sell abroad where prices are higher; and the government has been selling imported rice at below cost price.

Sooner or later, these anomalies will have to be corrected for the sake of efficiency. The government has indicated that it will begin hiking fuel prices and electricity rates in April, which is bound to add more inflationary pressures to the economy.

This is an inflation whose origin is clear, but whose end is still not visible. Thankfully, the rupiah has stabilized over the past few days, although the market still needs some convincing.

At Rp 10,000 to the dollar, the rupiah's exchange rate is four times what it was seven months ago, and double the rate used in calculating the government's budget. While the government appears hopeful that the rupiah value will rise to Rp 5,000, we have yet to see any game plan on how it hopes to achieve this goal.

By now, most people are resigned to the fact that their standard of living has been cut and are making painful adjustments to their spending patterns. But they are still in the dark as to the magnitude of sacrifices they have to make.

What the government should do is to let the people know how bad things are going to get -- if indeed they are going to get worse -- and how much longer they will have to endure it. It might sound too alarmist, but this is better than living in endless uncertainty.