South Africa’s inflation target of 3%-6% per year was announced in 2000. Over the past 25 years, the target range has served the country well.
The groundwork for the successful implementation of monetary policy to achieve this target was set in the 1990s, under the leadership of Chris Stals as Reserve Bank governor. Before his tenure, it was often argued that South Africa would never get inflation under control. With the annual rate close to 17% in 1987, it is easy to understand why there were so many sceptics.
But never is a very long time. The Bank under Stals proved these sceptics wrong, ushering in a declining trend in inflation.
Subsequent governors — Tito Mboweni (1999-2009), Gill Marcus (2009-2014) and Lesetja Kganyago (since November 2014) — have persisted with sound monetary policy, and the average annual rate of inflation over the past 25 years has remained within the target range. Lower inflation also led to lower inflation expectations.
Before I continue, and readers object to yet another article about inflation, I must state (again) that I am against it. This is confirmed by my trademark, inflation is ungood™ and my book on the same topic. In short, inflation is not a policy instrument.
When he presented his statement after the May 29 2025 monetary policy committee meeting, Kganyago alluded to the appeal of a 3% per year inflation target. I support a target at this level. This support, nevertheless, requires some elucidation.
In the past, the inflation target (and changes in the specification of the target) were announced by the minister of finance. This is therefore the direction in which we should look for the announcement of the target revision. I hope the announcement will be included in the medium-term budget policy statement in October.
There is a long lag between adjustments in monetary policy and the impact of such adjustments on the economy. Economists differ about the length of the lag, but it can be as much as two years. Sufficient time between the announcement and the effective date for implementation of the lower target should therefore be permitted.
As our inflation rate hovers around 3% per year, it is an opportune time to announce a lower target. The current rate can anchor expectations.
However, we must not repeat the mistakes of 2001 and 2002. In 2001, Trevor Manuel, as finance minister, announced that the inflation target would be 3%-5% for 2004 and 2005. This was a positive development, ushering in the objective of continued disinflation with a declining target.
Once announced, a lower target should not be abandoned
However, owing to negative international developments and a sharp decline in the rand exchange rate, this lower target was abandoned in 2002. This damaged the credibility of inflation targeting. Once announced, a lower target should not be abandoned.
As monetary policy is not an exact science, a new target of 3% should be buffered by a range of one percentage point on either side. This would allow flexibility to take account of the uncertain lags in monetary policy implementation.
One problem is the scepticism of many South Africans about the historic rate of inflation. There are many reasons for such mistrust, and the announcement of a lower target will be an opportunity to write about those reasons.
Credible historic inflation figures are important. The historic rate of inflation, rather than inflation expectations, is often used for remuneration adjustments.
One example of a historic price, adjusted for inflation, will help to put the credibility of historic inflation figures into perspective.
When I was appointed an assistant manager at the Bank in June 1986, the company car I received was a Honda Ballade 1500 automatic. Its price was R18,600 and, as a youngster, I was very proud of it.
Adjusted for inflation over the ensuing period, the price would be about R283,000. Put differently, since 1986, prices have increased by a factor of about 15.2.
A similar car today would be the Honda Amaze Comfort CVT, priced at about R293,000. The Amaze has many extras that the Ballade did not have, such as ABS brakes, airbags, parking sensors, power steering and a rear-view camera. The cost of these standard items amounts to more than R10,000.
So, adjusted for quality improvements and compared to inflation, the Amaze is cheaper today than a Ballade nearly 40 years ago. There are many other examples of price increases corresponding with inflation over long periods.
It is also possible to name examples of items whose prices increased much more rapidly than the average rate of inflation over any period of comparison. Such examples simply help to confirm that the average rate of inflation is an accurate reflection of average price increases over time.
It reminds me of the old anecdote: If you are with your feet in the oven and your head in the freezer, on average, you are comfortable.
Rossouw is an honorary professor at Wits Business School and an economist at Altitude Wealth
Would you like to comment on this article?
Sign up (it's quick and free) or sign in now.
Please read our Comment Policy before commenting.