What drives household inflation expectations in South Africa? Demographics and anchoring under inflation targeting

Abstract

Demographic determinants (i.e., gender, income, education, race, age) of one year ahead inflation expectations in South Africa are explored. Surveys covering the period 2006–2016 are examined via a mix of time and cross-sectional methods. In doing so, we uncover clear behavioural biases in how respondents view the inflation outlook. Education and income tend to be inversely related to inflation expectations. This is consistent with the literature, although we observe significant changes over time that many other surveys are unable to uncover. Inflation expectations also respond to recently observed inflation, but this is likely facilitated by priming in the survey since respondents are given the previous year and five years mean inflation rates. Younger individuals have lower inflation expectations and react significantly to central bank communication, which is a novel variable not included in other studies of this kind. Another demographic characteristic interacting with communication by the South African Reserve Bank is race. Finally, the direction of change in inflation, that is, whether it is rising or falling, also matters. Hence, even if respondents are primed, they appear to be aware of changes in the direction of inflation. This represents an additional novel feature of the study.