Fundamental

Do You Believe In Released Inflation Data?

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Many feel that the release of inflation delivered by the official body of a country, whether it’s a statistical body or a central bank, does not fully reflect the state of the economy. The reason is that the people feel the prices have risen exceed the inflation mark delivered by these institutions.

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This is actually very reasonable, because the inflation delivered by an official body or institution is headline inflation. Headline inflation or general inflation calculates all available goods and services, and then compares the price within a certain period. Of course, for most people there are who feel that prices are rising high in certain products, but there are also  products or services observe decreasing price in certain area.

Statistical institutions calculate all prices of goods, ranging from the small pin to aircraft engines. What is needed by the community every day or only needed occasionally are counted. Even items that for some people have never been purchased, will still be counted. This is what makes people sometimes feel that what the statistical agency says doesn’t reflect their economic situation.

With the weighting method, all increases in prices of goods and services are calculated. This calculation uses the Consumer Price Index (CPI) method which is set at base value of 100. For example, the CPI rises from 100 to 101, meaning that there is 1% inflation in a country. The CPI itself is calculated on a certain year basis. If the 2014 CPI is 100 and the 2019 CPI is 110, for example, meaning that in 5 years there will be 10% inflation.

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For households, the biggest expenses are usually food, utilities, transportation and education. If someone still rents a house, rising property prices also have an effect. Not surprisingly, inflation that occurs in households is different from that delivered by agencies or institutions. Households may not be aware of increases in ship ticket prices, for example, but an official body or agency will calculate this.

Based on that, the inflation in the household is usually higher. This is in line with the report also from statistical agency, inflation of foodstuffs is higher than general inflation. Not to mention the inflation of education, which every year goes up double digits. This all leads to higher household inflation compared to general inflation.

If we calculate, food inflation is around 10% every year, education is 15% a year. If these two expenditure items are dominant in a household, that means inflation in the household is at least 10% a year. Compare to national headline inflation, the release of Indonesian inflation is at 3%, obviously this is far above average. In other words, a family must be able to add a minimum income of 10% to maintain their lifestyle and purchasing power.

If household inflation is the same every year, then within 7 years, a household must double its income to cover inflation. Because within 7 years and inflation of 10%, the arithmetic formula has reached 100% of the inflation value. Households who cannot respond to this number with the same increase income must face with two choices: reducing spending or reducing the quality of purchasing power and lifestyle.

Therefore, we should also be able to calculate own household inflation. If most of the expenditure is for food, then we must be aware of rising prices of food goods. If most of it is used for utilities (electricity, water, telephone) then beware of tariff increases. And so on, so we can find out how much income we must earn every year to maintain a lifestyle every year.

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