Price setting behaviour is surprisingly under-researched in South Africa. It really matters: it affects assessment of the optimal inflation target and conduct of monetary policy.
How regularly prices change provides insights into menu costs that lead to firms changing prices less frequently, although they are also affected by how consumer prices are surveyed and aggregated. We observe an upward trend in the frequency of 8-digit category (around 400 items) price changes in South Africa. The chart below shows that the average fraction of categories in consumer prices that change every month was 85%. Since 2009, price increases occurred with an average monthly frequency of 56%, while price decreases have occurred at a frequency of around 29%. This indicates a significant degree of asymmetry in price setting, with price increases occurring more frequently than price decreases. It is worth pointing out that these price change frequencies are more than four times higher than those reported by Ruch, Rankin and Du Plessis (2016) at individual product and retailer level. This is not surprising given the high degree of aggregation even at 8-digit level (the highest level of publicly available data). But it demonstrates that policymakers need to look at product and retailer level data to be in a position to assess inflation dispersion and price setting behaviour. The likely explanation for the asymmetry in inflation outcomes, in line with Ruch, Rankin and Du Plessis (2016), is that demand and supply shocks drive CPI increases as opposed to South Africa having purely indexed price increases for most price categories.
For monetary policy, this means the central bank has to understand the economic drivers of inflation pressures and price setting decisions to make appropriate policy decisions. Best practice among leading central banks facing such inflation dynamics is to explain the economic drivers of dispersion in inflation and the central bank’s approach to addressing such dispersion. The thinking is that such transparency helps to anchor inflation expectations and maintain the credibility of the central bank as an inflation targeter. What the South African debate is missing is structural analysis of the drivers of inflation dynamics, ongoing monitoring of price setting behaviour, and analysis of the implications for the optimal inflation target. Asymmetry in price setting contributes to persistent inflationary pressures, which may weaken the transmission of monetary policy. This has implications for the optimal measure of inflation the central should monitor, with core inflation measures providing a better gauge of underlying inflation trends.
Compiled by Lisa Martin
Footnote
Examples of earlier research in South Africa include Creamer and Rankin (2008), Ruch, Rankin and Du Plessis (2016) and Botha et al. (2022).
