Impacts of Earthquakes on Consumer Price Index and Inflation: A Case Study in West Nusa Tenggara Province, Indonesia

Abstract

Since Indonesia is located in the Ring of Fire, it is well understood that it has been highly vulnerable to earthquakes. Earthquakes can have many effects, including infrastructure damage and socioeconomic disruption. During 2009 to 2019, West Nusa Tenggara Province had the most earthquake frequencies. This paper aims to investigate the impacts of earthquakes on the regional economy of West Nusa Tenggara Province on the consumer price index (CPI) and inflation using the autoregressive integrated moving average with exogenous variables (ARIMAX) method. The data used in this paper are monthly CPI and the inflation in West Nusa Tenggara Province from January 2008 to December 2018. Based on the modeling process, two models for CPI and inflation are obtained. The forecast values of CPI are converted to inflation values to produce an indirect inflation forecasting, and the RMSE of four models are compared. The overall best model, with the smallest RMSE, for inflation is ARIMAX with stochastic trend and seasonal variable, which indicates that direct forecasting using inflation data is better than indirect inflation forecasting using CPI. From the best model, the earthquake effect, i.e., the real and estimated effects, has positive and negative effects on CPI and inflation with the magnitude of the real effect that is larger than the estimated effect. These two conditions indicate that the model cannot forecast well the earthquake effect. Therefore, much greater anticipation is necessary from local governments regarding the impact of the earthquake on the prices of essential commodities that is likely to occur in the future