Inflation in South Africa : 1921 - 2006. History, measurement and credibility

Abstract

Please note: This degree was awarded by the University of Kwazulu-Natal. Permission was granted to archive it in this database for teaching purposes.This study reports the development and use of an original methodology to measure inflation credibility, as well as the first results of such measurement in terms of an inflation credibility barometer. The barometer is an instrument measuring the degree of acceptance of the accuracy of historic inflation figures. Despite the lack of knowledge about inflation and the low inflation credibility recorded by this first calculation of an inflation credibility barometer for South Africa, valuable information about inflation is unveiled to the authorities. The research results serve as a benchmark, but cannot be compared to earlier research, as this study represents the first systematic measurement of inflation credibility in South Africa. The barometer yields better results than the limited current international measurement of perceptions of the accuracy of historic inflation figures. The barometer (i) reports the credibility of inflation figures as a figure between zero and 100; (ii) will highlight changes in credibility over time with repeated use; (iii) can be explained easily to the general public; (iv) provides for international comparison between countries; and (v) can be used by all countries. The use of inflation credibility barometers and changes in barometer readings over time can also serve as an early warning system for changes in inflation perceptions that might feed through to inflation expectations. Sampling results used to calculate a South African inflation credibility barometer show little public understanding of the rate of inflation. Owing to an increased focus on inflation figures in countries using an inflation-targeting monetary policy, central banks entrusted with such a policy should adopt a communication strategy highlighting the calculation and measurement of the rate of inflation. This study shows that no generally accepted international benchmarks for successful central-bank communication strategies have been developed, but the use of the methodology developed in this study will assist in the assessment of the effectiveness of communication strategies. This study makes three further contributions of significance to available literature on inflation in South Africa. The first is an analysis of prices increases and inflation over a period of 85 years (1921 to 2006) and a selected comparison of salaries and remuneration over a period of 78 years (1929 to 2006). To this end data sets were developed for comparative purposes, thereby distinguishing between perception and reality about the accuracy of inflation figures over time. As this comparison has not been done before, a methodology was developed that can be used in future research. Based on these comparisons an inflation accuracy indicator (IAI) is developed for the first time. The research showed no systematic over or under-reporting of price increases, therefore confirming the general accuracy of the consumer price index (CPI) over time. As with the inflation credibility barometer, this methodology can be used internationally to confirm the accuracy of countries’ inflation figures over time. This methodology can also be used by developing countries with capacity constraints in economic modelling and forecasting. The second contribution to available literature is the first analysis of South Africa’s experience with inflation over a period of 85 years from the perspective of the central bank. This analysis highlights not only the difficulties encountered by a central bank to contain inflation, but also focuses the attention on the policy errors of the authorities in their quest to contain rising prices. The third contribution is an analysis of international and domestic initiatives aimed at improving the accuracy and measurement of inflation. The implications of these initiatives for developing countries are considered in the interest of a level international playing field between developed and developing countries. eo