Although now is not the right time to meddle with the inflation-targeting framework, an assessment will be appropriate once the dust has settled, said Sanlam chief economist Jac Laubscher on Wednesday.
“Perhaps the change in 2003 in the definition of the South African Reserve Bank’s target of an annual average to the year-on-year inflation rate as reported monthly was not such a good idea,” he said.
By its very nature the latter is more volatile and overemphasises temporary sharp movements in the inflation rate, which could result in equally sharp movements in inflation expectations and interest rates. “Inflation expectations are, after all, measured with reference to the annual average inflation rate,” he said.
Laubscher said that in their monetary policy it is not unusual for central banks to focus on some measure of core inflation — the United States Federal Reserve, for example, focuses on the personal consumption expenditure deflator, excluding food and energy.
“The Bank of Canada defines its inflation targets in terms of the overall CPI inflation rate, but uses core inflation as its operational target. Canadian core inflation excludes the most volatile items [fruit, vegetables, fuel, oil, natural gas, interest on bonds, intercity transport, tobacco and the effect of changes in indirect taxes on the remaining components] in order to stabilise monetary policy,” he pointed out.
He said the South African Reserve Bank could argue that it does the same, in effect, by emphasising the second-round effects of higher fuel and food prices — for example, the bank regularly refers to the increase in the CPIX excluding fuel and food.
“[This] has likewise increased to more than 6%, which justifies the increase in the repo rate, although it still leaves the question regarding the required extent of rate increases unanswered.”
The New Zealand Reserve Bank manages price volatility by focusing on the medium-term inflation trend, and not on the monthly year-on-year inflation rate.
This also applies to the Australian Reserve Bank, which has explicitly stated its opposition to “a hard-edged target band within which inflation is to be held at all times”.
“As shown in the examples above, the way in which the South African Reserve Bank approaches its inflation target is therefore certainly not the only possibility,” Laubscher said. — I-Net Bridge