South Africa sets monetary policy nationally, but markets, spending patterns and governance, all determinants of inflation vary regionally. In our working paper (Governance, and Regional Dynamics of Inflation Persistence: Evidence from South Africa), we use the raw price observations that Statistics South Africa collects to construct consumer price indices for 27 municipalities over 2008–2023. The exercise reveals substantial variation in inflation levels, dynamics, and, critically, persistence across space, and points to local governance quality as a key moderator of how quickly price shocks dissipate.
Building inflation from the ground up
The national CPI is assembled from price quotes gathered across the country and weighted by a single representative basket. We instead assign each municipality its own expenditure weights and its own set of local price quotes, producing municipality-specific CPIs and the corresponding monthly and year-on-year inflation rates. From these, we derive a persistence score – a summary of how much current inflation reflects its own past – both as a single value per municipality and as a rolling window that tracks changes through time.
To make sense of the cross-municipal variation we bring in two observable local features: nighttime light intensity as a proxy for economic activity, and municipal audit outcomes as a proxy for governance quality. We also split each local basket into market-determined prices (set competitively) and administered prices (tariffs, fees, and regulated charges), allowing us to ask whether governance operates differently across these two components.
Three headline findings
Regional inflation diverges meaningfully. Provincial inflation paths are not the same everywhere, and zooming in further, municipalities within the same province can diverge just as much. These are not transient gaps; the dispersion is visible across the full sample period. Lower-activity areas tend to exhibit more persistent inflation, consistent with slower price adjustment in thinner markets where distribution constraints bind more tightly.
Figure 1: Regional inflation diverges meaningfully
Governance moderates the activity–persistence relationship. When we examine rolling-window persistence jointly with governance and economic activity, a clear pattern emerges. At low levels of economic activity the differences across governance categories are hard to distinguish. As activity rises, however, the gap widens: better-governed municipalities see price shocks fade more quickly, while persistence remains elevated in their poorly governed counterparts. Governance, in other words, does not simply reduce persistence on its own, it conditions how the local economy processes shocks.
Figure 2: Governance moderates the activity–persistence relationship.
The governance channel runs primarily through administered prices. Splitting the basket sharpens the picture. Administered prices show a tighter association with governance quality, which is intuitive: municipal audit outcomes reflect the institutional capacity behind tariff-setting, procurement, billing, and public financial management – exactly the mechanisms that determine how administered prices are revised. Market-determined prices, by contrast, show a weaker within-municipality relationship with governance in the fixed-effects specifications, suggesting that their adjustment depends more on economic activity, competition, and local market frictions than on the audit regime alone.
Figure 3: The governance channel runs primarily through administered prices.
Why this matters for monetary policy
Where persistence is high, a given interest-rate move takes longer to bring inflation down; where it is low, the same move transmits more quickly. A single policy rate therefore has uneven bite across regions. Identifying where and why persistence is elevated helps the central bank calibrate its communication and motivates complementary interventions that monetary policy alone cannot deliver.
Policy implications
These findings point to several concrete directions.
Regional persistence as a signal for monetary strategy. The variation in how quickly price shocks appear to fade across municipalities suggests that a single policy rate may not transmit equally across regions. Some of that unevenness seems rooted in local administrative processes and market conditions that sit outside the reach of interest-rate changes. If these regional differences are as systematic as the analysis suggests, policymakers should consider treating them as part of the information base that shapes monetary decisions — including by assessing which regions are most exposed when policy settings change.
Governance reform to support macroeconomic stabilisation. If governance indeed moderates persistence, and the association appears strongest in administered prices, then strengthening municipal financial management and moving tariff-setting toward predictable, cost-reflective schedules should be considered as a way to address the institutional frictions that may sustain persistence in the prices local government directly controls. This sits alongside monetary policy rather than replacing it — a structural complement to macroeconomic stabilisation.
Connecting municipal pricing decisions to the broader policy framework. Municipal administrators who set water tariffs, electricity charges, and service fees may not have a clear view of how those decisions interact with monetary policy transmission. Greater coordination — ensuring that local officials understand how their pricing processes may amplify or dampen the effectiveness of national policy — could improve outcomes in municipalities where persistence appears most entrenched.
