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.