Inflation and Employee Purchasing Power

This chapter discusses the influence of inflation on employee well-being from a macroeconomic perspective. The discussion begins with an analysis of the Consumer Price Index (CPI) and core inflation based on the methodology of Statistics Indonesia (BPS), which employs the concept of a representative "shopping basket" to illustrate the dynamics of price changes for goods and services consumed by households on a daily basis. The discussion then proceeds to the fundamental distinction between nominal wages and real wages, drawing on the conceptual framework of Irving Fisher (1930) concerning real versus nominal values. Subsequently, this chapter explores the phenomenon of money illusion, based on the work of Shafir, Diamond, and Tversky (1997), which demonstrates the human tendency to think in nominal rather than real terms, thereby creating systematic bias in salary negotiations and economic decision-making. In the final section, this chapter presents strategies for designing inflation-resistant salary structures through the mechanism of Cost of Living Adjustment (COLA), drawing on the strategic compensation literature of Milkovich and Newman. This chapter is equipped with three visual elements: a table of the composition of Indonesia's CPI basket, a diagram comparing nominal wages and real wages during periods of high inflation, and a table illustrating examples of COLA implementation in multinational companies.