Application of GARCH model in the price inflation of foodstuff in West Java

Abstract

The risk and uncertainty faced by consumers and producers due to fluctuations in food prices in recent years have continued to increase. One of them is the fluctuation in the price of foodstuffs which are basic human needs. The process of increasing prices in general and continuously related to the market mechanism which can be caused by various factors is called inflation. Inflation can be measured by calculating the change in the percentage rate of change in a price index. In this study, the index used is the Consumer Price Index (CPI), which is an index that measures the average price of certain goods purchased by consumers. The food price index tends to have high volatility, this can be seen from the sharp increase and decrease in the price of food commodities in Indonesia. Data that has high volatility will be very risky if you use the basic time series method which has stationary data and costly variance, for that we need a method to deal with data that has non-constant and changing variance, or is called heteroscedasticity. Therefore in this study using the GARCH model application to analyze data on foodstuff price inflation in West Java. The results showed that the best GARCH model for foodstuff price inflation data is the ARCH (1) model, which means that the variance of foodstuff price inflation in period t is determined by a constant (1.565) and the remaining square in the previous period with a proportion of 74.41. %.