What drives household inflation expectations in South Africa? Demographics and anchoring under inflation targeting

Vol: 
48/2018
Author name: 
Du Plessis S
Reid M
Siklos P
Year: 
2018
Month: 
October
Abstract: 

This paper examines the demographic determinants of inflation expectations in South Africa. Five surveys covering the period 2006-2016, and consisting of over 12000 observations were empirically examined using time series, cross-sectional, censored and quantile regressions. We assess whether factors such as gender, income, education, race and age, impact one year ahead inflation expectations. In doing so we uncover clear behavioural biases in how respondents view the inflation outlook. For example, education and income tend to be inversely related to inflation expectations. This is consistent with the literature although we observe significant changes over time that many other surveys are unable to uncover. In addition, it seems that inflation expectations respond to recently observed inflation. Unlike other studies, younger individuals have lower inflation expectations and we conjecture that the adoption of inflation targeting in South Africa played a role. Finally, we find that demographic characteristics interact with communication by the South African Reserve Bank, as well whether inflation is rising or falling. These are two additional novel features of the analysis.

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