A comparison of inflation expectations and inflation credibility in South Africa: results from survey data

8 September 2015
Publication Type: Policy Brief

Inflation expectations receive considerable attention in the inflation reports of central banks in inflation-targeting countries as they play a key role in informing monetary policy. Inflation expectation surveys among consumers in South Africa are undertaken with the financial assistance of the central bank, while inflation perception surveys among consumers are a private initiative. Inflation perceptions describe and/or report views of consumers on past price level movements and historic inflation, while inflation expectations of consumers describe and/or report views on the expected future trend and movement in price levels and, therefore, inflation.

Local and international research show that central banks in the cluster of inflation-targeting countries use various approaches to obtain a measure of inflation expectations, but that inflation perception measures, receive little attention.

The first policy recommendation is that the central bank should also accept responsibility for the latter surveys as this will increase the data sources at the central bank’s disposal when monetary policy decisions are made within an inflation-targeting monetary policy framework.

Apart from finding a large number of “don’t know” responses in the survey results, a comparison of the results of the two surveys (perceptions and expectations of inflation) by means of a multinomial analysis show, among others, that there are differences in the inflation perceptions of female and male respondents. The results suggest that more female respondents perceive historic inflation figures to underreport actual price increases than male respondents. In general the results showed a limited feedthrough of inflation perceptions informing inflation expectations. However, more surveys have to be undertaken before any final conclusion can be reached on such feedthrough, although initial indications are that inflation perceptions inform inflation expectations. The policy implication is that any attempt of the central bank to contain inflation expectations should address inflation perceptions: if consumers doubt the accuracy of historic inflation data, and instead perceive higher historic inflation rates, they will expect inflation to be high in the future. By understanding demographic biases in the formulation of inflation perceptions and expectations, policy-makers can be better prepared for anchoring inflation expectations.

The results from the multinomial analysis also show that consumers are more likely to perceive historic inflation as accurate during periods of higher inflation, rather than lower inflation. It is not yet clear whether this is a result of actual trends in price increases or whether consumers perceive price increases to be generally higher than what is reported by official numbers. This is a question that can only be clarified by means of more research into the matter and hence the policy recommendation is that the central bank should assume more responsibility for research into inflation perceptions.

It is striking that the acceptance of historic inflation figures as accurate is low in a low inflation environment. This seems to indicate that respondents confuse price levels and price increases (i.e. inflation). This is an area for further research, as it might have implications for inflation targeting as a policy regime.

Clarity about the inflation expectations of different groups and their perceptions about the credibility of historic inflation data can assist central banks in targeting more accurately their communication initiatives. This analysis might serve as an early warning of groups with overly high inflation expectations or incorrect perceptions of historic inflation rates that might lead to unrealistically high wage demands.

The overarching policy recommendation is that the South African Reserve Bank as central bank of the country should assume larger responsibility for research into inflation perceptions. Moreover, any attempts to contain inflation expectations should focus on addressing perceptions that historic rates of inflation underreport actual price increases in the economy.

Series title: Research Brief 41
1 September 2015