During the COVID-19 pandemic, a significant divergence emerged between South Africa’s GDP deflator, which measures inflation for all domestically produced goods and services in a given year, and the CPI, which tracks inflation for a fixed basket of consumer goods and services, including imports.
One reason the CPI may understate inflation during a pandemic is that it fails to account for shifts in spending patterns. Over the last two years, however, CPI inflation has been higher than the increases in the GDP deflator.
Any potential bias in CPI measurement would have implications for the optimal inflation target for an inflation-targeting central bank as it can affect the credibility of the central bank by creating a divergence between the experience of households and firms and official statistics. We estimated this bias in our inflation targeting paper, available here.
Compiled by Tashen Naidoo
