The study was based on the period prior to the inflation target and the period of the inflation target. The study was conducted to determine whether there is a link between CPIX inflation and other factors that influence inflation.
Objectives and research questions to be investigated
The importance and motivation for the study
The prices of various goods and services are collected monthly from retailers and service providers to determine the CPI. CPIX (Consumer Price Index Excluding Interest Rates on Mortgage Bonds) is therefore a better inflation indicator than the CPI.
Problem statement
In essence, it determines what out of every R100 the average South African consumer spends on a given basket of goods and services, including housing, food and transport. As interest payments on mortgage bonds make up a large part of household expenditure, and it is also a variable controlled by the authorities, it is not included in the inflation calculations (if the SARB raises interest rates to reduce inflation, housing costs rise and in turn inflation rises).
Limitations of the research
Structure of the research
Summary
LITERATURE REVIEW
Introduction
Causes of inflation
A one-time increase in the money supply causes inflation in the short term (the price level rises from P0 to Pi). This may therefore lead to short-term inflation, but it will not cause long-term inflation.
Prerequisites for inflation targeting
Loayza and Soto (2000) warn that a change in the structure of the economy is likely to affect inflation forecasts. Forecasts that ignore this factor may lead to errors and this will again damage the central bank's credibility.
Advantages and disadvantages of inflation targeting
34; Inflation targeting helps to discipline monetary policy and increases the accountability of the Reserve Bank." In addition to the above disadvantages of inflation targeting, the major disadvantage of inflation targeting is when the bank constantly misses the target.
Success of inflation targeting in South Africa
Merits of inflation targeting in South Africa
The higher interest rates were due to the fluctuation of the M3 and the SARB tried to control the limits of the M3 target. The SARB has set a target of bringing the average inflation rate in line with the average of international trading economies to ensure competitiveness.
Trends in inflation
This was mainly due to the 34 percent depreciation of the nominal effective exchange rate during 2001. 1999) argue that the exchange rate can be allowed to depreciate at a predetermined fixed rate which can cause domestic inflation to be more higher than that of the largest country. The period of the 1990s was characterized by lower inflation, while the exchange rate was increasing at an exponential rate.
The inflation targeting regime (2000 onwards) shows that there is a correlation between the exchange rate and inflation. This relationship is due to the stance taken by the SARB when it adopted the inflation targeting policy that it will not intervene or target the exchange rate. This is evident from the exchange rate shocks experienced in 2001, where inflation was severely affected (see figure 2.7.6 above).
Credibility of the current inflation target
The Reserve Bank then decided to take a break from consumer spending by raising interest rates in June, August and October. It is projected to fall outside the target band in the first quarter of 2007 and will only be within the target band during the second quarter of 2007 (Robbins, 2006). The Bank has made it clear to the public how inflation forecasting works and the public should not be surprised by higher forecasted inflation rates.
Summary
RESEARCH METHODOLOGY
- Introduction
- Research hypothesis
- Data analysis methods
- Summary
The first sub-hypothesis will test the relationship between inflation at time t and the factors influencing inflation. The second sub-hypothesis will test the relationship between inflation and the factors affecting inflation at lags of up to eight quarters. The research design is based on a time series, correlational research, and the data will be presented with samples in the relevant periods.
The data were evaluated to determine whether inflation is related to the factors that contribute to inflation and the degree of correlation. This correlation coefficient is used to determine the strength of the relationship between two variables and the direction of the strength (indicated by the sign of the coefficient). This chapter discussed data collection, data sources, and data manipulation in terms of statistical implications and the software to be used.
PRESENTATION OF RESULTS
- Introduction
- Same Period tests
- Lagged period tests
- Summary
The second sub-hypothesis stated that there is no relationship between CPIX inflation and the factors that affect inflation in subsequent periods. This chapter has outlined the statistical results of the correlations and the significant tests for the same periods and lagged periods. The same period hypothesis stated that there is no relationship between CPIX inflation and the factors influencing inflation.
The lagged period hypothesis stated that there is no relationship between CPIX inflation and the factors that affect inflation in subsequent periods.
Interpretation of results 5.1. Introduction
Correlation during the same period
- CPIX inflation versus food, transport and housing inflation
There is therefore no correlation between CPIX inflation and M3 measured over the same period. Therefore, there is no correlation between CPIX inflation and the slowdown in housing inflation during inflation target periods. Therefore, there is no correlation between CPIX inflation and the quarterly slowdown of Brent crude oil.
There is therefore a correlation between VPIX inflation and the lag of the domestic exchange rate up to eight quarters. The periods before inflation targets show that there is a weak positive correlation of 23% between CPIX inflation and the current account deficit with GDP when lagged to eight quarters. There is therefore no correlation between CPIX inflation and the lag of the current account deficit to GDP.
Comparative analysis: Before and during inflation targeting
The pre-inflation targeting period has a conservative effect on CPIX inflation until the third quarter lag (14% of CPIX inflation is explained by the turnover lag until the third quarter). Periods prior to inflation targeting show that the impact of Brent crude lags on CPIX inflation is insignificant. Brent crude has the largest impact on CPIX inflation during the inflation targeting regime.
A comparison between these periods shows that Brent crude oil has an impact on CPIX inflation during the fifth quarter. The inflation-targeting regime shows that the effect of M3 on CPIX inflation could be felt by the economy from the seventh quarter onwards. The inflation targeting policy shows that the impact of the current account deficit on GDP on CPIX inflation is larger during the first quarter.
Summary
The correlation between CPIX inflation and the slowdown in the current account deficit to GDP is very weak. So the impact of the current account deficit on GDP on the economy could last as long as twelve months.
CONCLUSIONS AND RECOMMENDATIONS
Research objectives
LIBRARY^/
Conclusions
The pre-inflation targeting period shows that there is no correlation between CPIX inflation and the domestic exchange rate measured over the same period. However, there is a weak positive correlation between CPIX inflation and the domestic exchange rate during the inflation targeting period. Before the inflation targeting period, there is no correlation between CPIX inflation and the current account deficit relative to GDP measured over the same period.
Before the inflation targeting regime, there is a weak positive correlation between CPIX inflation and the lag of the domestic exchange rate. Before the inflation targeting regime, there is a weak positive correlation between CPIX inflation and the lag of M3. However, there is a strong correlation between CPIX inflation and the current account deficit relative to GDP during the inflation targeting regime.
Recommendations
Before the inflation targeting regime, there is no correlation between CPIX inflation and the current account deficit relative to GDP when it is lagged up to 2 years. The study could not prove the correlation between CPIX inflation and Brent crude oil measured during the same period. It also failed to prove the correlation between CPIX inflation and the money supply measured over the same period.
Suggestions for further research
In relation to fiscal policies such as government spending, a study is required to determine the effect of reducing inflation on economic growth. A study is required to determine the strength of the relationship between the producer price index and inflation (does it feed into inflation figures such as food prices?). To some extent, oil prices feed on transport inflation, a study is required to explore the relationship between oil prices and transport inflation.
A study of the fluctuation of the velocity of money can shed light on why the relationship between money supply and inflation is often weak or non-existent. This is not a threat as long as demand does not exceed supply (can lead to a rise in price levels), but the impact of this on inflation was not investigated in this study. It will be interesting to determine whether the effect of the credit extension on inflation is short-term or long-term.
BIBLIOGRAPHY
Mishkin, F S 2000, 'Inflation targeting in emerging market countries', Working Paper 7618, National Bureau of Economic Research, marts 2000, pp. Roisland, O & Torvik, R 2004, 'Exchange rate versus inflation targeting: a theory of output fluktuations i handlede og ikke-handlede sektorer', Journal of International Trade & Economic Development, 13(3), s.265-285. Sherwin, M 2000, 'Reserve bank of New Zealand: Institutional frameworks for inflation targeting', Bank of Thailand Symposium, Practical Experiences on inflation targeting, 20. oktober 2000, Bangkok.
Woglom, G 2003, 'How has inflation targeting affected monetary policy in South Africa?', The South African Journal of Economics, 71 (June 2003), p. inflation versus current account deficit in %GDP. Constant) Actual AccO Actual Act Actual Actual Acc2 Actual Acc3 Actual Acc4 Actual Acc5 Actual Acc6 Actual Acc6 Actual Act7 Actual Acc8.
CPIX CurAccO CurAcd CurAcc2 CurAcc3 CurAcc4 CurAcc5 Cur Acc6 Cur Acc7 Cur Acc8. inflation against current account deficit as. Constant) Current AccO Current A c d Current Acc2 Current Acc3 Current Acc4 Current Acc5 Current Acc6 Current Acc7 Current Acc8.
UNIVERSITY OF
KWAZULU- NATAL
