Abstract
We establish that nominal wage and consumer price inflation have six disinflation episodes and are highly synchronised. The trends show that nominal wage and consumer price inflation have trended downwards over the sample period. Nominal wage inflation trend has declined significantly post the recession in 2009 and is approaching the upper band of the 3–6 per cent inflation targeting range. Furthermore, real wage inflation has had eight disinflation episodes compared to the six episodes established for nominal wage and consumer price inflation. In addition, real wages have been consistently growing below the long-term average of 2.52 per cent since 2012Q1. It is the first time in history that such a trend in real wage growth has been observed.
The results in this chapter indicate that the consideration of nominal wage growth does not necessarily imply a high level of inflation inertia or persistence compared to consumer price inflation. Thus, assessing the role of second-round effects emanating from the labour markets should be an integral part of the monetary policy formulation process. Furthermore, we establish that there are output and employment costs incurred during disinflation episodes. The employment costs associated with disinflationary episodes are much higher compared to output costs and in some instances were more than double than those on output. The policy implication is that there is a case for the consideration of other macroprudential tools that complement the repo rate in neutralising the adverse effects of disinflation on GDP growth and employment growth.
This is a preview of subscription content, log in via an institution to check access.
Access this chapter
Tax calculation will be finalised at checkout
Purchases are for personal use only
Notes
- 1.
It is also noteworthy that an understanding of the evolution of nominal wage inflation over the disinflation episodes is an indirect way of assessing the role of second round effects to the degree that they are approximated by nominal wage price inflation.
- 2.
We establish a negative relationship between nominal wage and consumer price inflation and employment growth in Fig. 2.15 in the Appendix.
- 3.
- 4.
- 5.
See Ndou and Gumata (2017) for further reading.
- 6.
We apply the same definition to the measurement of the sacrifice ratios and disinflation episodes based on nominal wage inflation.
- 7.
- 8.
We calculate the output and employment costs as the average decline in output and employment growth during the disinflation episode.
- 9.
Positive sacrifice ratio values suggest that during that disinflation episode, a reduction in inflation led to an improvement in output.
- 10.
Alternatively, when pursuing the mandates of price and growth stability and maximum employment.
References
Ball, L. 1994. What Determines the Sacrifice Ratio? In N. G. Mankiw (ed.), Monetary Policy. University of Chicago Press, pp. 155–82.
BFAP. 2011a. South African Agricultural Baseline 2011.
BFAP. 2011b. The Contribution of the Agro-Industrial Complex to Employment in South Africa. Tech. Rep. June, The Bureau for Food and Agricultural Policy, Pretoria.
Brainard, L. 2017a. Understanding the Disconnect between Employment and Inflation with a Low Neutral Rate. Speech at The Economic Club of New York New York City, 5 September 2017.
Brainard, L. 2017b. Navigating the Different Signals from Inflation and Unemployment. Speech at the New York Association for Business Economics, New York City, 30 May 2017.
Bry, G., and Boschan, C. 1971. Cyclical Analysis of Time Series: Selected Procedures and Computer Programs. NBER Books. ISBN 0-87014-223-2.
Gumata, N., and Ndou, E. 2017. Bank Credit Extension and Real Economic Activity in South Africa: The Impact of Capital Flow Dynamics, Bank Regulation and Selected Macro-prudential Tools. Palgrave Macmillan. ISBN 978-3-319-43550-3.
Hall, S.G., Henry, S.G.B., and Wilcox, J.B. 1989. The Long-run Determination of the UK Monetary Aggregates. Discussion Paper Series, No. 41, Bank of England.
Hall, S.G., Hondroyiannis, G., Swamy, P.A.V.B., and Tavlas, G. 2008. A Portfolio Balance Approach to Euro Area Money Demand in a Time Varying Environment. Bank of Greece.
Harding, D., and Pagan, A. 2002a. A Comparison of Two Business Cycle Dating Methods. Journal of Economics Dynamics and Control, 27, 1681–90.
Harding, D., and Pagan, A. 2002b. Dissecting the Cycle: A Methodological Investigation. Journal of Monetary Economics, 49, 365–81.
Kashkari, N. 2017. Why I Dissented at the March 2017 FOMC Meeting. https://www.minneapolisfed.org/news-and-events/messages/why-i-dissented.
Mayes, D., and Chapple, B. 2009. The Costs and Benefits of Disinflation: A Critique of the Sacrifice Ration. Reserve Bank of New Zealand Bulletin, 58(March), pp. 9–22. Reserve Bank of New Zealand.
Ndou, E., and Gumata, N. 2017. Inflation Dynamics in South Africa: The Role of Thresholds, Exchange Rate Pass-through and Inflation Expectations on Policy Trade-offs. Palgrave Macmillan. ISBN 978-3-319-46701-6.
Ndou, E., Gumata, N., and Ncube, M. 2017. Global Economic Uncertainties and Exchange Rate Shocks. Palgrave Macmillan. ISBN 978-3-319-62279-8.
Yellen, J.L. 2017. From Adding Accommodation to Scaling It Back. Remarks by at the Executives’ Club of Chicago Chicago Hilton 720 S. Michigan Avenue Chicago, IL. https://www.federalreserve.gov/newsevents/speech/files/yellen20170303a.pdf.
Author information
Authors and Affiliations
Appendix
Appendix
Consumer and nominal wage price inflation and employment growth. (Source: Authors’ calculations)
Output and employment deviations from trend during disinflation episodes. (Source: Authors’ calculations)
Trend nominal wage and consumer price inflation during disinflation episodes. (Source: Authors’ calculations)
Rights and permissions
Copyright information
© 2019 The Author(s)
About this chapter
Cite this chapter
Gumata, N., Ndou, E. (2019). Does the Consideration of Nominal Wage Growth Imply a High Level of Inflation Inertia or Persistence Compared to Consumer Price Inflation?. In: Accelerated Land Reform, Mining, Growth, Unemployment and Inequality in South Africa. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-030-30884-1_2
Download citation
DOI: https://doi.org/10.1007/978-3-030-30884-1_2
Published:
Publisher Name: Palgrave Macmillan, Cham
Print ISBN: 978-3-030-30883-4
Online ISBN: 978-3-030-30884-1
eBook Packages: Economics and FinanceEconomics and Finance (R0)