New inflation measure for South African Reserve Bank

The South African Reserve Bank has constructed a new inflation measure to monitor underlying price developments that will help support monetary policy decision making.

Supercore inflation is made up of core price growth components that are more likely to be triggered by general economic conditions as measured by the output gap and show high sensitivity to the business cycle, authors including Samantha de Kock, MG Ferreira, and Mpho Rapapali said in a central bank economic note published Friday.

The measure will assist policymakers to distinguish short-lived inflationary pressures from those showing more persistent trends, the authors said.

It will also be used alongside headline and core inflation, which strips out food and non-alcoholic beverages, fuel and energy prices.

“Broadening the suite of measures for assessing underlying price pressures enhances robustness and confidence of correctly pinning down the persistent inflationary dynamics given the uncertainty around any single such measure,” the authors said. This is crucial for the formulation of monetary policy, they said.

While headline inflation is still above the midpoint of the central bank’s 3% to 6% target range, where it prefers to anchor expectations, supercore has hovered around the midpoint in recent months, the authors said.

This suggests that demand-driven inflationary pressures are presently more balanced, they said.

That may add to the case for the central bank’s monetary policy committee to cut borrowing costs as soon as September.

The key interest rate has been at a 15-year high of 8.25% since mid-2023, and the MPC has said it will only change course once inflation is sustained at the midpoint.

The bank now sees inflation moderating to 4.3% in the last quarter of 2024.