Inflation, Interest Rate and Wage Trade-offs in Southeast Asia Countries

This paper focused on the factors that give impacts to the inflation in Southeast Asia countries, including Brunei, Cambodia, Indonesia, Loas, Malaysia, Myanmar, the Philippines, Singapore, Thailand, and Vietnam. This paper has analysed the relationship between inflation and factors that influence inflation in Southeast Asia. The hypothesised factors are crude oil, interest rate, money supply, nominal wage, and unemployment rate. The panel data analysis was tested using the panel unit root test. Then, the Pooled Ordinary Least Square (POLS), Fixed Effects Model (FEM), and Random Effects Model (REM) were caried-out. Hausman Test, Poolability F-Test, and Breusch-Pegan Lagrange Multiplier Test (LM) were applied to select the best estimated model. The diagnostic checking performed as well in order to detect any underlying economic problems under the model. Crude oil was found to be significant, and positively relate to inflation. Interest rate and nominal wage are found significant and negative relate to inflation. Variable that are found insignificant to inflation are money supply, and unemployment rate. To mitigate the oil shock suffered during the 1970s oil crisis and high crude oil price, Southeast Asia countries are recommended to accelerate the use of more renewable energy as a substitution of crude oil, so that they are easily be affected by the increases in oil price. Based on the study, when the interest rate is high, it is recommended that the central bank can increase the interest rate when confronting inflation. This is due to when the interest rate is high, bank loans will become more expensive because the borrower will pay more by the maturity date. Thus, the borrower will reduce applying to loan as well as spending lesser. When the inflation is getting higher, the Government will consider increase of the minimum wage, while promoting the adoption of digital technology to improve productivity.