Abstract:
As inflation credibility in South Africa records low readings when measured in terms of inflation
credibility barometers, this note aims at assessing whether actual price movements provide any
grounds for low inflation credibility. It compares the price movements of similar items with the
rate of inflation over a period of 32 years, i.e. from 1974 to 2006, and discusses the use of an
inflation accuracy indicator to compare estimated price levels adjusted by the rate of inflation
and actual price levels. Over the period of comparison no systematic over- or under-reporting of
changes in prices in terms of the rate of inflation could be detected and the analysis suggests that
little or no basis can be found to justify low inflation credibility. Inflation credibility is more likely
than not influenced by the most recent purchasing experiences of consumers. Doubts concerning
the accuracy of inflation figures could nevertheless result in the general public concluding that
monetary policy aiming at the achievement of an inflation target brings only the pain of high
interest rates without the tangible benefits of lower inflation, thereby jeopardising the usefulness
of an inflation-targeting monetary policy framework.
