An estimate of the persistence of inflation captures the long-run effects of a shock on inflation. A better understanding of the persistence of inflation can be useful for a variety of reasons. Firstly, a persistence measure can provide important information about the likely impact of shocks on the economy over time. This information can be extremely useful for the purpose of setting monetary policy, especially in a small, open economy like South Africa. Secondly, estimates of persistence over time can shed some light on the performance of monetary policy under different policy regimes. Finally, persistence estimates could assist in the identification of underlying inflationary pressures in the economy. This paper addresses these three issues with a reference to the South African experience. There are basically three main conclusions that emanate from the results in this paper. Firstly, there has been a significant decline in the persistence of inflation in South Africa. This decline occurred during the inflation targeting (IT) regime which suggests that IT provided a good anchor for inflationary expectations, despite the economy being subject to sizable external shocks during this period. Secondly, inflation at the disaggregate level is lower than at the aggregate level. This implies that the impact of external shocks on aggregate inflation will depend on each commodity’s level of inflation persistence as well as its weight in the consumption basket. Finally, a core measure of inflation, which considers both the persistence of inflation at the disaggregate level as well as the weight of the commodity in the consumption basket, does a better job in identifying the underlying inflationary pressures in the economy when compared to the other more readily available core measures. This measure may thus be a useful addition to the range of indicators considered for policy-making purposes.
by 