Since the previous Monetary Policy Review (MPR) was published in May 2011, the prospects for global and domestic growth have deteriorated. Growth in a number of advanced economies has slowed, and confidence levels have been undermined by renewed financial market turbulence, generated in large part by the unresolved European sovereign debt crisis. Some advanced economies face prolonged periods of economic adjustment, and although emerging markets are expected to continue to outperform advanced economies, their growth will be affected by the challenging environment. Heightened perceptions of risk by global investors have resulted in increased volatility of capital flows worldwide. Recent shifts in capital flows have also impacted on the domestic capital and foreign-exchange markets. South Africa’s fragile and uneven domestic economic recovery is evident in recent economic data. After providing the main support to the domestic recovery for the past two years, growth in household consumption expenditure slowed markedly in the second quarter of 2011. Growth forecasts have been lowered following the deterioration in the global growth outlook, the weaker-than-expected domestic growth outcome in the second quarter, and the impact of industrial action on key sectors of the economy. Domestic inflation also picked up during the period under review, with oil, food and administered prices rising strongly. However, wage pressures have eased somewhat, and targeted inflation has remained within the inflation target range of 3 to 6 per cent.This MPR analyses the latest developments in inflation and the factors that impact on it. It reviews recent monetary policy developments, discusses the outlook for inflation and presents the South African Reserve Bank’s (the Bank) growth and inflation forecasts. In addition, topical issues are addressed in boxes. The first box reports on the high-frequency reaction of the rand per US dollar exchange rate to inflation surprises, and considers whether there is a negative correlation between inflation surprises and changes in the nominal exchange rate in the very short term. The second box provides an assessment of the accuracy of the forecasts of inflation provided by the Bank’s suite of models.