Inflation Expectation Survey

Based on international best practices, the BER applies the following method to measure inflation expectations in South Africa:

• Direct quantitative surveys (i.e. respondents have to indicate what they expect CPI inflation to be during the specific year and not whether they expect price increases to be up, the same or down compared to the same time a year ago).
• The surveys are conducted quarterly.
• Four societal groups are quizzed, namely financial analysts, business people, trade union officials and households
• The questionnaire of the Livingston Survey at the Federal Reserve Bank of Philadelphia and the Survey of Expectations of the Reserve Bank of New Zealand served as a guideline.

Financial analysts, business people and trade union officials could complete the questionnaire on-line or receive and return the questionnaire per post. Households are interviewed directly.

Completion of the questionnaire - who, when and how?

• Who? The best person to complete the questionnaire is in a non-financial sector firm: the chief executive, financial director, head of research and planning, senior sales manager or senior production manager. In a financial sector firm: the economist, head of research or senior fund manager. In a trade union: the secretary general or senior representative.
• When? Participants receive the questionnaire every quarter and are asked to return it by the date specified on the questionnaire.
• How? It only takes a few minutes to complete the questionnaire, as participants probably already know their answers, given that they regularly make forecasts when drawing up budgets, conducting wage negotiations or deciding to make investments. New participants are asked to complete a ‘participant details form' to ensure that their details are correct.

Confidentiality is guaranteed. Individual replies are not published or quoted.

Conducting Inflation Expectations Surveys in South Africa

For the benefit of the reader interested in the theoretical issues involved in conducting an Inflation Expectations Survey, the following documents have been made available by the BER.

• Short (popular) version
• Longer (academic) version
• What Drives Household Inflation Expectations in South Africa? Demographics and Anchoring Under Inflation Targeting
• The BER's Inflation Expectations Surveys: Know your data
• The BER's Inflation Expectations Surveys: Findings from Academic Research

The Minister of Finance announced a national policy of inflation targeting in his Budget Speech on 23 February 2000. It is vital for South Africa to bring down our inflation rate in line with our overseas trading partners, so as to make us more competitive and ultimately to make better provision for our people.

Many factors influence inflation, such as an increase in the international oil price, a fall in the rand exchange rate and so on. However, few realise what the impact business and other role-players' expectations have on inflation. For instance, if companies and their labour force expect inflation to be 5%, employers will tend to increase prices by 5% or more and employees will demand wage and salary increases of 5% and more.

The Monetary Policy Committee (MPC) of the SARB sets monetary policy (i.e. interest rates) to achieve the inflation target set by government. To affect this successfully, the MPC needs to anticipate what actual inflation will be a year or two in advance - and to do this, it needs to know what different societal groups expect that inflation will be.

An Inflation Expectation Survey is therefore required to gauge the expectations of role-players in our economy. As a result, the SARB approached the BER to conduct an ongoing survey on their behalf.

Groups taking part in the survey include households, the business sector, trade unions and financial analysts. The combined effect of all these inputs provides a reliable reflection of general expectations

Inflation targeting

Inflation targets are designed to help the South African Reserve Bank to reduce and control inflation and achieve long-term price stability in various ways, by

• providing an 'anchor' for monetary policy
• communicating to the public the objective of monetary policy
• co-ordinating wage and price determination by affecting inflation expectations
• improving the transparency and accountability of monetary policy and
• enabling the central bank's inflation-fighting credibility to be assessed and enhanced.

Internationally, there has been a growing trend to adopt inflation targeting as the primary focus for the conduct of monetary policy. Among the countries that have discovered the very real rewards of inflation targeting are Sweden, Canada, the UK, Australia and New Zealand.

Measuring CPI

Inflation is defined as a sustained increase in the general price level of goods and services in an economy over a period of time. The chief measure of price inflation is the inflation rate, defined as the year-on-year percentage change in the consumer price index (CPI) over time.

A price index measures the price level of a market basket of goods and services. Such an index is a statistical estimate constructed using the prices of a sample of representative items whose prices are collected periodically. Consumer price inflation refers to price changes in consumer goods and services such as fuel, food, clothing and vehicles. It is measured from the perspective of the buyer.

As a token of the South African Reserve Bank's and the BER's appreciation, participants receive an exclusive, free copy of the summary of survey results. This provides them with a valuable insight into not only the sentiments and beliefs of their own and other key sectors, but of the overall consensus of expectations arrived at in the national survey. The summary of results also assists them in their planning for the future.

Importance of the Inflation Expectation Survey for South Africa

The Monetary Policy Committee (MPC) of the South African Reserve Bank (SARB) monitors these results closely and uses them to help determine official monetary policy. This is a survey of national importance that benefits the whole country and cannot be done without the voluntary input of and goodwill from participants.