Measuring core inflation for South Africa: a Common Trends approach

Abstract

In this study, we estimate core inflation in South Africa using a common trend model over the period from the first quarter of 2000 to the first quarter of 2022. In this framework, core inflation is estimated from the information contained in the following variables: the Consumer Price Index (CPI), the Money Supply (M3), Real Production (real GDP). Unlike other commonly used measures such as the structural VAR model, the core inflation obtained by the common trend method has a strong correlation with monetary growth and less volatile than headline inflation. It provides an estimate of underlying inflation based on broader information, integrating macro-economic variables which play an important role in determining the long-term inflation rate. It thus makes it possible to identify the strategies of monetary and budgetary policies making it possible to achieve the inflation target and an economic growth objective.