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Core Inflation Determinants: Decomposition Of Global And Domestic Factors Associated With Sectoral Inflation

Author

Listed:
  • Donni Fajar Anugrah

    (Bank Indonesia)

  • Rakhmat Pratama

    (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.

Suggested Citation

  • Donni Fajar Anugrah & Rakhmat Pratama, 2018. "Core Inflation Determinants: Decomposition Of Global And Domestic Factors Associated With Sectoral Inflation," Working Papers WP/31/2018, Bank Indonesia.
    • Handle: RePEc:idn:wpaper:wp312018
    as

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    References listed on IDEAS

    as
    1. Reza Anglingkusumo & Tri Winarno & Deasy Ariyanti, 2013. "Dampak Upah Terhadap Produktivitas Dan Inflasi: Studi Sektoral Dan Regional," Working Papers WP/06/2013, Bank Indonesia.
    2. Logan Rangasamy, 2009. "Inflation Persistence And Core Inflation: The Case Of South Africa," South African Journal of Economics, Economic Society of South Africa, vol. 77(3), pages 430-444, September.
    3. Terry J. Fitzgerald, 1999. "Money growth and inflation: how long is the long run?," Economic Commentary, Federal Reserve Bank of Cleveland, issue Aug.
    4. Wimanda, Rizki E. & Turner, Paul M. & Hall, Maximilian J.B., 2011. "Expectations and the inertia of inflation: The case of Indonesia," Journal of Policy Modeling, Elsevier, vol. 33(3), pages 426-438, May.
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    More about this item

    Keywords

    core inflation; backward expectation; error correction mechanism (ECM);
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models

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