'€œInflation is always and everywhere a monetary phenomenon.'€ (Milton Friedman, 1963). Without any intention to deny Friedman'€™s proposition, inflation in Indonesia is not just a monetary issue. In other words, it is not always that demand pulls inflation, when aggregate demand exceeds aggregate supply.

In fact, it has been quite frequent in Indonesia that supply shocks lead to hikes in general prices. Due to a lack of infrastructure '€” both in quantity and quality '€” the shocks are also caused by inefficient supply chains. So, the flow goes from inefficient supply chains to inflation. It is costs that push inflation.

Yet it does not stop there. Worse still, the inflation rate is usually used to determine the costs of goods distribution. The higher the inflation rate, the higher the costs will be. The situation eventually generates a vicious cycle.

Among other factors, inefficient supply chains arise due to the phenomenon of asymmetric information. According to Wikipedia, information asymmetry deals with the situation in transactions where one party has more or better information than the other. Although it often appears where the seller knows more than the buyer, the reverse can happen as well. This creates an imbalance of power in transactions, which can often cause unnecessary costs in the economy.

In Indonesia, inefficient supply chains exist in the market of agriculture-related commodities. Producers or farmers do not have direct access to consumers or households, and vice versa. This leaves room for intermediary chains. Unfortunately, the chains are quite long.

Let us take chili supply chains as an example. According to some officials, supply chains of chili from production centers in East Lombok, West Nusa Tenggara, to Kramat Jati Central Market in East Jakarta, involve at least four steps of distribution: from farmers to small collectors, then to large collectors, then to the wholesalers, and them finally to the traditional market traders.

In fact, most of transaction mechanisms in the agricultural commodities market are controlled by agents in the middle of the supply chain. Furthermore, in many cases, farmers become more dependent on collectors, including those in finance. As a result, collectors become more powerful than farmers in determining the price of products.

If the price is somewhat unfavorable, the collectors can simply refuse to collect and distribute. This is why, sometimes, plenty of rotten vegetables are discharged in one region while elsewhere vegetables are in short supply causing prices to hike.

No wonder, it is quite frequent that volatile food prices contribute to inflation. For example, shallots, garlic and chili together pushed up the Consumer Price Index (CPI) by 0.63 percent in the March 2013. For Indonesian families, such surging costs for the main seasoning ingredients in local foods were serious issues.

To battle inflation caused by inefficient supply chains, the government should take responsibility by reducing information asymmetry, especially in the agricultural commodities market.

But how exactly? Fortunately, there are solutions to the problem of asymmetric information. Among these solutions, increasing the access to information is paramount.

Theoretically, the degree of information asymmetry goes down along with more access of information. Therefore, giving consumers greater access to information directly addresses the problem of asymmetric information. In the context of supply chains of agricultural commodities in Indonesia, greater access to information should also be given to farmers. This is because the source of the problem lies in intermediary agents.

Malaysia is a good example of how a government provides information on prices that is reachable to everybody. In 2011, the Malaysian government launched 1Pengguna.com, a portal used to compare all the prices of goods at different stores. Inflation is also the main reason why they did so. Later, the government also launched a mobile app called MyKPDNKK, which tells people which shops offer more reasonable prices.

The Indonesian government should make use of technology to make information on prices accessible to all. It would be even more enticing if the technology could connect farmers directly to consumers.

A series of benefits could be reaped if this were to be put into practice. Farmers could earn a better price since they could sell products directly to consumers. For consumers, there will be more choice. This would induce competition among producers and create competitive prices.

Asymmetric information that is attributable to inefficient supply chains is one of the challenges of controlling inflation in Indonesia. Additionally, managing inflation in a vast archipelago such as Indonesia also demands better distribution channels.

Therefore, provision of broader access to information coupled with other market regulatory solutions and improvements in connectivity between regions can make supply chains more efficient and reduce the probability of supply shocks and upward price pressures. That is how technology can help government to control prices and, hence, improve overall consumer satisfaction.
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The writer is an economic analyst at Bank Indonesia. The views expressed are his own.

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