The formation of inflation expectations in South Africa
Nelene Ehlers and Rudi Steinbach
Last Modified Date:
2021-05-28, 12:35 PM
Publications > Working Papers
Abstract: A key factor in the inflation-targeting regime is the psychological process by which individuals and firms form their expectations of future inflation. From a monetary policy perspective, it is important to analyse this process, since under full rationality, only unexpected changes in inflation will affect real variables. In this paper, data from both the Bureau for Economic Research’s Inflation Expectations Survey and the Reuters Inflation Expectations Survey are evaluated, over different forecasting horizons to asses the characteristics of expectations formation across different economic groups in the South African economy. The results do not provide strong evidence to indicate that South African economic agents are exclusively rational or exclusively adaptive in formulating their inflation expectations. However, it appears that individuals employ some form of non-homogenous learning by combining some features of rationality with adaptive behaviour in order to minimise their forecast errors over time, subject to their respective available resources.