Inflation in South Africa, 1921 to 2006 : history, measurement and credibility.

Abstract

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 price 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 (JAI) 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.