Abstract
This study investigated the determinants of inflation in South Africa using quarterly data from 1970Q1 to 2015Q4. The study was motivated by recent trends in domestic inflation that has frequently been at the upper end of the target range of between 3% and 6%, and the need to guide inflation-related policy since 2008. These recent trends raised concerns regarding the effectiveness of the current monetary policy approach in responding to internal and external factors that are significant in determining domestic inflation. Using Error Correction Model (ECM) modelling techniques, empirical results revealed that inflation expectations, labour costs, government expenditure and import prices are positive determinants, while GDP and exchange rates are negative determinants of inflation. To achieve the macroeconomic policy objective of a stable and low inflation rate for South Africa, more emphasis should be placed on anchoring inflation expectations, which was found to be highly significant in determining inflation.
Highlights
Inflation remains a crucial macroeconomic problem in South Africa, and the country continues to face a number of challenges with respect to persistent and escalating inflation rates
This study found that both cost push and demand pull factors affected inflation in the long run, while short-run dynamics of inflation were explained by price expectations, labour cost and other exogenous shocks among other factors
This study investigated the determinants of inflation in South Africa for the period from 1970Q1 to 2015Q4
Summary
Inflation remains a crucial macroeconomic problem in South Africa, and the country continues to face a number of challenges with respect to persistent and escalating inflation rates. Various economists and policy makers have different views on whether inflation occurs as a consequence of demand-side factors (an increase in economic activities) or supply-side factors (increase in the cost of production). Previous studies focused more on monetary and structural determinants of inflation, taking into account the impact of changes in monetary policy frameworks, economic sanctions and political turmoil of the previous government. The study intends to investigate the determinants of inflation with the aim of evaluating the effectiveness of anti-inflationary policy and to provide recommendations based on the results obtained from the model, with a view that the recommendations would assist policy makers in achieving the desired long-term inflation target of 3% – 6% in South Africa.
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