One way to assess how anchored inflation expectations are is to look at how inflation expectations react to deviations in inflation from the inflation target. Today’s post shows that inflation expectations in South Africa react more strongly to inflation deviations from the target than in the US, suggestive of less well-anchored expectations. The US’ inflation target, at 2%, is much lower than South Africa’s and there have been larger divergences in inflation outcomes from the target in the US. Even though there have been smaller divergences between headline inflation and the inflation target since 2013, there is still a high degree of dispersion across price categories that comprise the consumer price basket in South Africa (see here and here). High inflation dispersion has implications for the optimal inflation target and the optimal approach to inflation targeting. The second chart shows that US inflation expectations have also tended to be above actual inflation, although the difference has been 0.6% since 2013 (compared to 0.35% in SA).
