DOES INFLATION ON ADMINISTERED PRICES AND VOLATILE FOODS COMMODITIES REDUCE THE HOUSEHOLDS WELFARE IN ACEH, INDONESIA?

Abstract

High inflation is closely related to poverty. Inflation for volatile food is one of the causes of decreasing in household welfare. Volatile food commodities such as; rice, meat, fish, red chili, and shallot contributed to the inflation in the last three years. Likewise, administered price commodities such as LPG (liquefied petroleum gas), electricity, gasoline and water also contributed to high inflation. This study analyzes the effect of inflation on commodity-based welfare by analyzing the elasticity of demand for these commodities. The data used are cross section data obtained from the 2018 National Social Economic Survey (Susenas) of Aceh. The model used is the Almost Ideal Demand System (AIDS) model regressed with the Seemingly Unrelated Regression (SUR) approach. The results show that that most of the coefficient of the price has a negative and significant effect. The coefficient is used to calculate the elasticity of price variables, income elasticity, family size elasticity and education elasticity as control variables. The elasticity results indicates that prices greatly affect the decline in household welfare, displayed by the elastic value of demand for administrated and volatile food commodities while income elasticity, family size elasticity, and education elasticity shows an inelastic value. Therefore, it is recommended for Bank Indonesia and the government (in this case the Regional Inflation Control Team) to continue to pursue a commodity-based inflation control policy in Aceh. It is also necessary for the government to encourage more superior commodities, especially for volatile food commodities such as rice, meat, fish, red chili, and shallot. Producing more of the volatile food commodities will be important to maintain the price and quantity of food. In addition, the government must also provide symmetrical information about developments and plans to increase prices, thus not to cause excessive inflation expectations.