ARTICLES

 

South African price changes and inflation since 1974: A note on the testing of inflation accuracy¹

 

 

Jannie Rossouw^I; Vishnu Padayachee^II

^ISA Reserve Bank and Department of Economics, University of Pretoria
^IISchool of Development Studies, University of KwaZulu-Natal

 

 

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ABSTRACT

As inflation credibility in South Africa records low readings when measured in terms of inflation credibility barometers, this note aims at assessing whether actual price movements provide any grounds for low inflation credibility. It compares the price movements of similar items with the rate of inflation over a period of 32 years, i.e. from 1974 to 2006, and discusses the use of an inflation accuracy indicator to compare estimated price levels adjusted by the rate of inflation and actual price levels. Over the period of comparison no systematic over- or under-reporting of changes in prices in terms of the rate of inflation could be detected and the analysis suggests that little or no basis can be found to justify low inflation credibility. Inflation credibility is more likely than not influenced by the most recent purchasing experiences of consumers. Doubts concerning the accuracy of inflation figures could nevertheless result in the general public concluding that monetary policy aiming at the achievement of an inflation target brings only the pain of high interest rates without the tangible benefits of lower inflation, thereby jeopardising the usefulness of an inflation-targeting monetary policy framework.

JEL: E31

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1 The framework, theory and methodology used in this note draw on the PhD thesis by Jannie Rossouw, completed under the supervision of Prof Vishnu Padayachee at the School of Development Studies at the University of KwaZulu-Natal. Please see Rossouw (2008) in this regard. The views and opinions expressed in this note do not necessarily reflect the views and opinions of the SA Reserve Bank or any of the Universities. Comments and assistance of Mr Fanie Joubert of the Efficient Group and Ms Adél Bosch of the SA Reserve Bank on some aspects of this note is gratefully acknowledged