The Consumer Price Index (CPI) can be said to be a very important inflation indicator and is used by the government to determine the most effective economic policy. This index represents changes in the average retail price level at the level of consumers in a number of certain types of goods and services that are calculated in a certain period of time.
Inflation is directly tied to the purchasing power of domestic currencies and influences its position in the international market. If the economy develops under normal conditions, an increase in the CPI can cause an increase in the base interest rate. This will then lead to an increase in the attractiveness of the currency.
To calculate the CPI a basic reference is needed and starting January 2014, the CPI is presented using the 2012 base year = 100 and covers 82 cities consisting of 33 provincial capitals and 49 major cities throughout Indonesia. Previous CPI used 2007 base year = 100 and only covered 66 cities.
Above is the 2015 CPI and CPI inflation and current table taken from the Central Statistics Agency (BPS) website and it can be seen that the 2015 inflation rate of 3.35% is calculated based on changes in the CPI.
We need to understand that the government and the central bank always monitor changes in the CPI from time to time as a reference to knowing the inflation rate. In determining interest rates, the central bank always looks at changes in CPI indicators, in addition to some other fundamental indicators . And as a forex trader we must follow this CPI indicator data released every month because of its high impact on currency exchange rates.