The Propagating Effects of Inflation Risk Factors and the Implications for the Inflation Outlook
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This chapter assesses the extent to which risks to the inflation outlook in the short term propagate inflationary shocks. Evidence shows that headline and core inflation would have responded differently in the absence of grain price inflation, food inflation, exchange rate, eight-year breakeven inflation, commodity price changes, oil price change and retail sales growth. Before 2007M8 grain prices, food prices, oil prices, credit conditions, retail sales propagated inflation responses to inflationary shocks. But this changed after 2007M8 as these variables pulled down inflation. This means that rand exchange rate propagation effects changed slightly after the recession. The rand and breakeven inflation propagated the inflation responses to inflationary shocks to a large extent prior to the global crisis rather than after the recession in 2009.
Post-2007, the credit and demand factors as represented by the credit conditions index and retail sales help in neutralising inflationary pressures. On the other hand, factors such as the oil price, break-even inflation rates, grain and food prices, to the degree that they are associated with the rand exchange rate changes, are making positive contributions and propagating inflationary pressures. However, their contributions to inflation are less relative to that pre-2007, suggesting that the ERPT is muted post-2007 and the main underlying factor is muted demand and credit growth. However, the sharp exchange rate depreciation-induced inflationary pressures have offset the benefits accruing from low demand.