CORE INFLATION DETERMINANTS: DECOMPOSITION OF GLOBAL AND DOMESTIC FACTORS ASSOCIATED WITH SECTORAL INFLATION

Donni Anugrah and Rakhmat Pratama
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Rakhmat Pratama: Bank Indonesia

No WP/31/2018, Working Papers from Bank Indonesia

Abstract: Core inflation is the main component in the formation of inflation because it has the highest weight in the basket of inflation (± 60% of the weight of the Consumer Price Index/CPI). Core inflation is an anchor in the implementation of the Inflation Targeting Framework implemented by Bank Indonesia. Monetary policy is aimed at managing price pressures originating from the aggregate demand side relative to supply side conditions. This study aims to identify factors that influence the core inflation group and analyze the effect of rising prices of imported goods on the increase in tradable inflation. This study uses an econometric approach with the Error Correction Mechanism (ECM) method. Based on the results of empirical testing, core inflation is influenced by demand factors in the long run. In contrast, core inflation in the short term is influenced mainly by backward expectation with varying lags. Another factor, i.e., global commodity prices, has a positive and significant influence on tradable inflation. Meanwhile, seasonal factors such as the new school year have a positive and significant effect on general core inflation and the non-manufacturing sector.

Keywords: core inflation; backward expectation; error correction mechanism (ECM) (search for similar items in EconPapers)
JEL-codes: C32 E31 (search for similar items in EconPapers)
Pages: 28
Date: 2018
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