South African Inflation Expectations: Sensitivity to Surprises

How responsive is inflation expectations in South Africa are to unexpected shifts in key macro-economic variables? In theory, transparent and credibile policies pave the way for less aggressive policy adjustments to maintain price stability, since markets should believe that inflationary spikes are transitory. Since market players keep their expectations of long-term inflation at modest levels, they would not adjust their market decisions in a way that adds upward inflationary pressure.The empirical findings for South Africa, compare favourably with those of other countries and this supports the view that inflation targeting is a useful framework for the management of private sector expectations. If it is correctly applied, it improves the predictability of monetary policy, thereby facilitating the anchoring of inflation expectations.