Definition to Inflation - Bank Sentral Republik Indonesia
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September 21, 2019
Introduction to Inflation

 

Definition to Inflation    |    Disaggregation of Inflation   |   Important of Price Stability

In addition to the COICOP classifications, BPS now publishes inflation figures based on other classifications known as disaggregation of inflation. This disaggregation is performed by generating an inflation indicator more illustrative of the influence of fundamentals.

In Indonesia, CPI inflation is disaggregated into:

  1. Core Inflation, i.e. the persistent component within inflation movement,  influenced by fundamentals such as:
    • Supply-demand interaction
    • External environment: exchange rate, international commodity prices, trading partner inflation
    • Trader and consumer expectations of inflation.
  2. Non-Core Inflation, i.e. the inflation component marked by volatility due to the influence of non-fundamentals. The non-core components of inflation are:
    • Volatile Foods:
      Inflation predominantly influenced by shocks in the food stuffs category, such as harvests,​
      disruptions from natural events or movements in domestic food commodity prices and international
      food co​mmodity prices. 
    • Administered Prices
      Inflation predominantly influenced by shocks from government-announced prices, such as for​​
      subsidised fuels, electricity billing rates, transport fares and so on.

Inflation Determinants

Inflation arises from pressures on the supply side (cost push inflation), on the demand side (demand pull inflation) and inflation expectations. Factors driving cost push inflation arise from exchange rate depreciation, the impact of inflation in foreign countries and especially trading partners, increases in administered prices1 and negative supply shocks2 brought about by natural disasters and disruptions to distribution. Demand pull inflation is driven by high demand for goods and services relative to supply. Within the macroeconomic context, this condition is illustrated by real output in excess of potential output or aggregate demand beyond the capacity of the economy.

On the other hand, the inflation expectations factor is influenced by the behaviour of the public and economic actors in applying expected inflation figures in their economic activities. These inflation expectations may tend to be adaptive or forward looking. Reflecting this is the price forming behaviour at the producer and trader levels, especially in the period leading up to major religious festivities (Eid-ul-Fitr, Christmas and New Year) and when new rulings are issued on the regional minimum wage. Although the general availability of goods is seen as adequate to cope with increased demand, prices of goods and services at times of religious festivities mount beyond the levels explained by the supply-demand condition. Similarly, when new rulings are issued on the regional minimum wage, traders also raise prices even though the wage increase has only modest significance in fuelling increased demand.

 

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