Understanding Inflation in the context of a Natural Disaster; Case study of the inflationary consequences of the Tsunami in Aceh province, Indonesia, December 2004

This paper is inspired by the economic situation in Aceh, following the Tsunami disaster on [date]. Inflation increased and the high rate of inflation created obstacles for recovery agencies trying to implement their various missions. However, the true source of inflation has never been closely scrutinised .It is argued that the assumption that emergency aid is the main source of inflation is somewhat incorrect. The study finds that there exists no compelling indication that excess money stock is the source of inflation in Aceh. The damage in the production sector, as part of the supply side was a more dominant cause of inflation. Moreover, the increase of price of national fuel is also identified as a supply shock indicator which boosts inflation. Consequentially, this also indicates the ways in which policy is conducted incorrectly. This paper also discovers that inflation is not always a nation-wide issue but instead it is a challenge which occurs in specific areas, requiring specific consideration. At last, this paper finds that there is a need to have a policy in place for specific local macro economies so as to manage inflation in a more positive manner. -- Relevance to Development Studies -- This study opines that developing countries have different characteristics whilst rebuilding their development pillars, compared to those of developed countries. Macroeconomic policy is one of the instruments which need to be independently and effectively established. In this regard, the structuralist inflation theory is one of the schools of thought that closely analyse the real situation of developing countries. This suggests that the developing countries have to examine the real cause of the issue first, before adopting sound policy regarding inflation.