Relative price variability: Which components of the consumer price index contribute towards its variability?

23 January 2014
Publication Type: Working Paper
JEL Code: E31, E52

This paper follows work by Choi, Kim and O’Sullivan (2011), but deviates from their analysis by looking at the relative price variability (RPV) of selected components of the consumer price index (CPI) rather than an aggregate measure. The purpose of this work is to analyse which components are more variable and to see if there has been a change in the RPV (i.e., mean and distribution) since the adoption of inflation targeting (IT) in South Africa. A semi-parametric methodology has been used, and the RPV of components pre-IT and during the IT era were considered to see if the relationship of RPV components produces results similar to those presented for aggregate headline CPI for South Africa in Choi et al. (2011). The results suggest that in most cases, the components of the CPI have experienced decreased mean inflation rates and narrower distributions during the IT period with the changes in the mean and distribution of RPV decreasing and narrowing in most cases. Furthermore, the nature of the relationship of the RPV of the components with inflation seems to fit a quadratic specification well, with a minimum relative price variability at a positive rate of inflation. These results are found to be fairly robust during the period tested.

Working paper 412
1 January 2014