Introducing a new measure of inflation pressure for South Africa

Inflation dispersion affects the extent to which inflation harms welfare. As a result, inflation dispersion bears on the optimal inflation target and assessment of the appropriate stance of policy at any particular point in time. In this policy brief, we propose a new measure of inflation dispersion for South Africa, drawing on hundreds of goods and services categories to summarise inflation pressure in South Africa. We show that inflation dispersion describes divergences in inflation from the inflation target. Our analysis suggests that a lower average inflation level may not automatically imply lower inflation dispersion in South Africa, making it harder to anchor inflation expectations at a lower inflation target. This means that reforms to address persistently high administered price inflation and monetary policy communication focused on what policy must do to address inertial price and wage settings are particularly important.