In my view, inflation is ungood™, a term I have trademarked. It has significant redistributive effects benefiting those who can protect themselves against rising prices, at the expense of those who have no protection.
Grant recipients, pensioners, depositors receiving interest from banks and others on fixed incomes are the major victims of inflation. As the real value of debt is eroded by inflation, the government is often a major beneficiary of inflation. The real value of government debt gets eroded, though the interest payments on the debt remain a major burden on the government.
Inflation is a monetary phenomenon that feeds on money. In a barter economy, there is no inflation. The trade ratio of goods changes to reflect changes in relative scarcity. If the economy suffers from avian flu, the value of chickens and eggs — relative to other products — will increase until the outbreak is contained.
The condition for inflation to thrive is a monetary economy with money creation. When too much money creation takes place, inflation follows. South Africa suffered inflationary conditions for many years. Between 1970 and 1990, the average annual rate of inflation was about 12.4% (see graph).
Since the adoption of inflation targeting as South Africa’s monetary policy anchor more than 20 years ago, the average annual rate of inflation has declined to about 5.3%. After more than two decades of low inflation, it is easy to forget the long and difficult struggle to contain price increases.
Chris Stals, who turned 90 on March 13 2025, was at the helm of the struggle to contain inflation. After he was appointed as governor of the Reserve Bank on August 8 1989, he committed to containing inflation. There was only one problem: after two decades of double-digit inflation, this commitment was not generally believed.
At that time, many commentators argued that South Africa had structural economic problems that made any expectation of low inflation nothing but a dream. A view even developed in some circles that South Africa should adopt policies to deal with (and live with) persistent double-digit inflation, rather than commit to low inflation.
Looking back to 1989, it seems that the FM had confidence in Stals and his ability to usher in sound monetary policy with FW de Klerk, who was elected state president of South Africa at that time.
A true central banker will always be against inflation
— Chris Stals
Unfortunately for Stals, the rate of inflation stayed high in the years immediately after he was appointed as governor. This shows the long lead time before sound monetary policy achieves its objective, namely a lower rate of price increases.
Luckily for South Africa, Stals and the Bank persisted with sound policy, despite criticism by many. Stals once said “a true central banker will always be against inflation” and followed this principle, despite three difficult years of persistently high inflation after he was appointed.
Happiness arrived only in 1993, when South Africa’s annual inflation rate dropped below 10% for the first time in two decades. Stals proved that South Africa can contain inflation with persistent sound monetary policy.
It seems that by 1995 the FM might have had some doubts about the ability to persist with the continuation of sound monetary policy.
Stals and the Bank nevertheless persisted, with the annual rate of inflation declining to 5.1% in 1999, the last year of his governorship. Indeed a major accomplishment, for which South Africa still owes a debt of gratitude.
During the years that Stals was governor, the Bank did not use a formal inflation target. From time to time there are remarks about an “informal target” that was used. Various such “targets” are mentioned, for instance, 5.5%, or inflation as close to zero as possible.
In a discussion at the time of his 90th birthday, Stals explained his aim (or “informal inflation target”). In his view, South Africa’s rate of inflation should be at a level corresponding to the inflation rates of the country’s major trading partner countries.
After a decade of successful persistence with South African monetary policy under the leadership of Stals, the country was ready for the adoption of a formal inflation target. Had the back of inflation not been broken in the 1990s, the target would have had no credibility.
After more than two decades of inflation targeting, it is time for the next step. The target of 4.5% as the midpoint of the range between 3% and 6% should be revised.
South Africa is ready for an inflation target of 3%, with a range of one percentage point on either side. This range will allow for the long lead time to deal with the type of criticism that nearly derailed the fight Stals led against inflation.
Rossouw is an honorary professor at Wits Business School and a former head of the school, as well as a former deputy general manager and currency specialist at the Reserve Bank
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