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Kannada Sangha Pune’s

Kaveri College of Arts, Science & Commerce, Pune
Academic Year 21-22
Department of Commerce
SYBCOM BUSINESS ECONOMICS- SEM 4 PROJECT
CASE STUDY
CLASS SUBJECT – (SEM)

• Name: Tejas Sanjay Patil

• Roll No: 318
• Class & Div.: SYBCOM C
• Email ID: [email protected]
• Contact No: 8381072078
• Name of Subject Teacher: Mrs. Saloni Joshi
• Name of Co-ordinator: Dr. Deepa Sathe
• Date of Submission: 03-06-2022
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INDEX
Sr. Title Pages
1. Introduction 3

2. Economic Background of selected developing country 4-6

3. Concept & Measurement of Inflation 7-13

4. Case Evaluation 14-16

5. Conclusion 17

6 References 18
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INTRODUCTION

I have selected Indonesia for my research and project.

Indonesia is a country located in South-eastern Asia between
the Indian Ocean and the Pacific Ocean. It has a strategic
location astride major sea lanes and is an archipelago of
17,508 islands, some of which border Timor-Leste, Malaysia,
and Papua New Guinea. The government system is a republic;
the chief of state and the head of government is the president.
Indonesia has a mixed economic system which includes a
variety of private freedom, combined with centralized
economic planning and government regulation. Indonesia is a
member of the Asia-Pacific Economic Cooperation (APEC) and
the Association of Southeast Asian Nations (ASEAN).
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ECONOMIC
BACKGROUND OFINDONESIA

Indonesia has played a modest role in the world

economy since the mid-20th century, and its
importance has been considerably less than its size,
resources, and geographic position would seem to
warrant. The country is a major exporter of crude
petroleum and natural gas. In addition, Indonesia is one
of the world’s main suppliers of rubber, coffee, cocoa,
and palm oil; it also produces a wide range of other
commodities, such as sugar, tea, tobacco, copra, and
spices (e.g., cloves). Nearly all commodity production
comes from large estates. Widespread exploration for
deposits of oil and other minerals has resulted in a
number of large-scale projects that have contributed
substantially to general development funds.

Agriculture, forestry, and fishing-

The consistent monsoon climate and almost even
distribution of rainfall in Indonesia make it possible for
the same types of crops to be grown throughout the
country. Less than one-fifth of the total land surface,
however, is devoted to crop cultivation. Most
agricultural land is dedicated to rice or to various cash
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crops. Intensive cultivation is restricted to Java, Bali,

Lombok, and certain areas of Sumatra and Celebes. In
Java much of the land of the northern coastal and
central plains is planted with rice. In the drier section of
eastern Java, crops such as corn (maize), cassava, sweet
potatoes, peanuts (groundnuts), and soybeans
dominate the small farms, although such cash crops as
tobacco and coffee also are grown on plantations

Finance-
Bank Indonesia, the central bank, is responsible for
issuing the rupiah, the national currency. Other major
government-owned institutions include the state
savings bank, banks specializing in rural and industrial
development, and a large commercial bank with
overseas branches. Each bank is diversified and
operates independently. Private domestic banks and
foreign banks also operate in Indonesia. Nonbanking
financial institutions are restricted. Indonesia has stock
exchanges in Jakarta and Surabaya.

Resources-
Indonesia has a large, and in many cases unprosecuted,
variety of mineral deposits. Mining, including the
extraction of oil and natural gas, accounts for roughly
one-tenth of the country’s GDP, and through exports
and taxation it contributes substantially to foreign-
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exchange earnings and development. The mining

industry employs only a tiny fraction of the workforce,
however.
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CONCEPT AND MEASUREMENT

OF INFLATION IN INDONESIA
Definition of Inflation
Inflation is a general increase in prices of goods and
services over a period of time. Deflation is the
opposite, namely a general decrease in prices over
time.

Inflation is calculated by BPS-Statistics Indonesia using

SEKI-IHK data. Higher prices of one or two goods do
not count as inflation unless the increase expands or
raises the prices of other goods.

Measuring CPI
Based on the Classification of Individual Consumption
by Purpose (COICOP), the Consumer Price Index (CPI) is
divided into the following seven categories:
1. Foodstuffs;
2. Processed Food, Beverages and Tobacco;
3. Housing
4. Clothing
5. Health
6. Education and Sport
7. Transportation and Communication

Data for each group is collected through the Cost of

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Living Survey (SBH).

Disaggregation of Inflation
In addition to the COICOP categories, BPS-Statistics
Indonesia also publishes inflation based on other
categories known as an inflation disaggregation.
Inflation is disaggregated in order to produce inflation
indicators that depict the influence of fundamental
factors.

In Indonesia, CPI inflation is disaggregated as follows:

1. Core Inflation, namely the persistent component
within inflation movements, which is influenced by
economic fundamentals, including:
Supply-demand interaction;
External environment: exchange rate: international
commodity prices, inflation in trading partner
countries;
Inflation expectations amongst merchants and
consumers.
2. Non-core inflation, namely inflation components
with higher volatility due to the influence of non-
fundamental factors. The components of non-core
inflation are as follows:
Volatile Foods: VF inflation is predominantly influenced
by shocks in the foodstuffs’ category, such as harvests,
natural disruptions or domestic and international food
price developments.
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Administered Prices: AP inflation is mainly influenced

by government price policy on subsidised fuel,
electricity rates, transportation fares and so on.
Determinants of Inflation
Inflation is driven by supply-side pressures (cost-push
inflation), demand-side pressures (demand-pull
inflation) as well as inflation expectations. Cost-push
inflation factors include exchange rate depreciation,
the impact of inflation in other countries, especially
trading partners, higher administered prices as well as
negative supply shocks due to natural disasters and
disruptions in the distribution chain.

On the other hand, demand-pull inflation factors

include high demand for goods and services relative to
supply. In a macroeconomic context, demand-pull
inflation is a condition illustrated by real output
exceeding potential output or aggregate demand
exceeding economic capacity. Meanwhile, inflation
expectations are affected by the behaviour of the
public and economic actors in terms of taking
economic decisions based on expected inflation.
Therefore, inflation expectations are adaptive or
forward looking.

This is reflected in the formation of prices at the

producer and merchant level, particularly during the
approach to a festive period (Eid-ul-Fitr, Christmas and
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New Year), and in the determination of the provincial

minimum wage (UMP). In general, although the
availability of goods is considered adequate to cope
with higher demand, the prices of goods and services
during festive periods tend to increase beyond typical
supply-demand conditions. Likewise, when new
provincial minimum wages are set, merchants tend to
raise prices despite only a moderate impact on
demand.

Importance of Price Stability

Low and stable inflation is a prerequisite for
sustainable economic growth that will ultimately
ameliorate public prosperity. Controlling inflation is,
therefore, critical considering that high and unstable
inflation has an adverse socioeconomic impact.

First, high inflation persistently erodes real income

over time, leading to a deterioration in living standards
and adversely affecting all, particularly those towards
the bottom of the pyramid.

Second, unstable inflation creates uncertainty amongst

economic actors in terms of their ability to make
decisions. Empirical experience shows that unstable
inflation undermines public decision-making in terms
of consumption, investment and production, thus
impeding economic growth.
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Third, a higher rate of domestic inflation compared

with neighbouring countries will lead to uncompetitive
domestic interest rates and intensify currency
pressures on the rupiah.

Fourth, the importance of price stability in relation to

financial system stability (reference).

Inflation Target
Through its mandate as stipulated in the Bank
Indonesia Act, Bank Indonesia's overriding objective is
to create and maintain rupiah stability. Rupiah stability
contains two salient aspects, namely stability in
relation to goods and services, which is reflected in the
interest rate, as well as stability against other
currencies that is reflected in the exchange rate against
foreign currencies.

Formulation of a single objective explicitly clarifies the

targets to be achieved by Bank Indonesia and also
delineates Bank Indonesia's responsibilities.
Consequently, attainment of the single objective is
simple to measure. In pursuit of its goal, Bank
Indonesia understands that stimulating economic
growth and controlling inflation must be aligned for
optimal and sustainable results in the long term.
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Inflation Control
Bank Indonesia monetary policy aims to manage price
pressures from aggregate demand (demand
management) relative to supply-side conditions.
Monetary policy does not respond to transient
inflation spikes caused by temporary shocks that will
fade over time.

Meanwhile, inflation is influenced by supply-side

factors and shocks, such as global oil price hikes, failed
harvests and floods. Based on the weights in the CPI
basket, the components of inflation influenced by
supply-side factors and shocks are represented by
volatile foods and administered prices, accounting for
around 40% of CPI.

Similarly, Bank Indonesia's ability to control inflation is

comparatively restrained in the event of major shocks,
such as during the fuel price hikes in 2005 and 2008,
which triggered significant inflation spikes.

Considering that inflation is influenced by shocks,

attainment of the inflation target requires cooperation
and coordination between the Government and Bank
Indonesia through integrated macroeconomic policy,
encompassing fiscal policy, monetary policy and
sectoral policy. Furthermore, the vulnerability of
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inflation in Indonesia to supply-side shocks

necessitates a specific policy response.

At the technical level, coordination between the

Government and Bank Indonesia is facilitated through
establishment of a Coordinated Inflation Target
Setting, Monitoring and Control Team (TPI) in 2005.
The members include Bank Indonesia and relevant
government ministries, including the Ministry of
Finance, Ministry of Home Affairs, Ministry of Trade,
Ministry of Agriculture, Ministry of Transportation,
Ministry of Energy and Mineral Resources, National
Development Planning Agency, Coordinating Ministry
of Economic Affairs, Ministry of Public Works and
Housing, Ministry of State-Owned Enterprises, Cabinet
Secretary and National Police of the Republic of
Indonesia.
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CASE EVALUATION
Acknowledging the importance of such coordination,
TPI was expanded to the regional level in 2008. Moving
forward, the Government and Bank Indonesia expect
more effective coordination with the support of the
central and regional TPI in the pursuit of low and stable
inflation towards sustainable economic growth.

Setting the Inflation Target

The inflation target is the rate of inflation that must be
achieved by Bank Indonesia in coordination with the
Government. In accordance with the Bank Indonesia
Act, the inflation target is set by the Government.
Pursuant to a Memorandum of Understanding (MoU)
between the Government and Bank Indonesia, the
inflation target is set for the upcoming three years
through a Minister of Finance Regulation (PMK). Based
on PMK No. 124/PMK.010/2017, dated 18th
September 2017, concerning the Inflation Target for
2019, 2020 and 2021, the Government set the inflation
target for 2019-2021 at 3.5%, 3% and 3% respectively
within a ±1% corridor.

Bank Indonesia expects the inflation target to be used

as a benchmark for businesses and the public when
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conducting economic activities moving forward,

thereby maintaining low and stable inflation. One
inflation control measure to ensure low and stable
inflation is to anchor public inflation expectations to
the target corridor (refer to the Minister of Finance
Regulation concerning the Inflation Target for 2016,
2017 and 2018 as well as the Minister of Finance
Regulation concerning the Inflation Target for 2019,
2020 and 2021).

The inflation target is published on the official Bank

Indonesia website as well as the websites of other
government institutions, including the Ministry of
Finance, Coordinating Ministry of Economic Affairs as
well as the National Development Planning Agency.
Prior to promulgation of Act No. 23 of 1999 concerning
Bank Indonesia, the inflation target was set by Bank
Indonesia. Since then, however, the Government has
been responsible for setting the inflation target in
order to strengthen the credibility of Bank Indonesia.

The inflation rate for consumer prices in Indonesia

moved over the past 61 years between 1.6% and
1,136.3%. For 2021, an inflation rate of 1.6% was
calculated.

During the observation period from 1960 to 2021, the

average inflation rate was 43.9% per year. Overall, the
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price increase was 78,664,025.83 %. An item that cost

100 Rupiah in 1960 was so charged 78,664,125.83
Rupiah in the beginning of 2022.

For April 2022, the year-on-year inflation rate was

3.5%.

Indonesia's annual inflation rate rose to 3.55% in May

2022 from 3.47% in April, compared with market
consensus of 3.6%. This was the highest print since
December 2017, with food prices rising 5.62%, the
most since March 2020, as consumption strengthened
sharply during the Eid-ul Fitr celebration. Additional
upward pressures also came from cost of housing &
utilities (2.12% vs 2.05% in April), furnishings (4.39% vs
4.23%), food services & restaurant (3.57% vs 3.47%),
transport (4.77% vs 4.84%), education (1.71% vs 1.71%)
and clothing (1.10% vs 1.83%). Meantime, cost of
information, communication & financial fell further (-
0.20% vs -0.22%). The headline index was within the
central bank's target range of 2 to 4% for the fifth
straight month. Annual core inflation rate was at
2.58%, compared with April’s 23-month high of 2.60%
and consensus of 2.7%. On a monthly basis, consumer
prices were up 0.4% in May, the least in 3 months and
compared with forecasts of a 0.41% gain.
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CONCLUSION
The level and volatility of Indonesia's inflation rate
have historically been higher than in peer emerging
nations. Whereas other emerging markets had
inflation rates of between three and five percent, per
year, during the period 2005 to 2014, Indonesia had
an average annual inflation rate of around 8.5
percent over the same period. Since 2015, however,
Indonesian inflation has been under control. In fact,
it entered a new era: the era of low inflation.
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Reference
▪ https://www.indonesia-
investments.com
▪ https://www.bi.go.id/en/def
ault.aspx
▪ https://tradingeconomics.c
om/indonesia/inflation-
cpi#:~:text=Indonesia%20Inf
lation%20Rate%20at%20Ove
r,the%20previous%20month%
20of%202.64%25.
▪ https://www.worlddata.inf
o/asia/indonesia/inflation-
rates.php#:~:text=Develop
ment%20of%20inflation%20r
ates%20in,rate%20was%204
3.9%25%20per%20year.
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-THANK
YOU-