Mind second round effects The effects of food and energy inflation on core inflation in South Africa

Witness Simbanegavi and Andrea Leonard Palazzi

No 11045, Occasional Bulletin of Economic Notes from South African Reserve Bank

Abstract: A review of the literature on second-round effects from food and energy (non-core) inflation shows that these effects are mainly transmitted via cost-push and demand-pull inflation channels. We deploy a gap model to investigate the presence of second-round effects in South Africa in the period 20032022. We find evidence that shocks to non-core inflation cause core inflation to revert to headline inflation, suggesting that these shocks transmit to core inflation. Core inflation reverts to headline inflation within one year, but the reversion is only partial, which could be interpreted as affirming the credibility of the South African Reserve Bank (SARB). Thus, following shocks to non-core inflation, policymakers should closely monitor conduits such as wage settlements and firms mark-ups for signs of spillovers and pass-through. Keeping inflation expectations well anchored should minimise these risks.

Date: 2023-06-29
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