The distribution of relative price changes matters for the optimal inflation target, as it affects the tradeoffs the central bank faces in stabilising inflation and output. The distribution of relative price changes in South Africa has a longer right tail, where a small number of items tend to experience
very high price increases. This means that mean inflation is pulled up by a high average inflation in a small subset of categories.
Today’s post plots the month inflation rate against the monthly share of
8-digit consumer price categories experiencing relative price increases (increases larger than the average for that month). When the share of relative price increases is low, the inflation rate tends to be high (and vice versa). In major advanced economies such as the United States (US) this relationship is tighter, though the relationship is also downward sloping (see Ruge-Murcia and Wolman 2024). This indicates greater inflation instability and more asymmetry in inflation components in South Africa than in advanced economies such as the US. An important reason for this is that there is greater heterogeneity in the volatility of shocks to supply or demand that affect different price categories in South Africa, given the role of categories such as administered prices and commodities in determining prices. The central bank has greater flexibility in managing supply-side shocks if the inflation target is specified as a range around a midpoint target.
Compiled by Lisa Martin
