Inflation Targeting

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It widely recognized that the monetary policy within a country should be primarily concerned with the pursuit of price stability. However, it is still not clear how this objective can be achieved most effectively. This debate remains unsettled, but an increasing number of countries have adopted inflation targeting as their monetary policy framework. (Dr E J van der Merwe, 2002) This topic of Inflation targeting is a subject which immediately conjures different perceptions from different people. Many feel that low inflation should be a main aim of monetary policy, while others (such as trade union activists) believe that a higher growth rate to stimulate jobs should be the main concern.

In order to understand what inflation targeting is and how it affects us, it is important to first establish what, in fact, inflation is.

Inflation can be defined as an increase in the general price level of goods and services. It is measured as the annual percent change in the prices of goods deemed necessary for life in that country. These goods are included in a "market basket" which changes infrequently, so this measure can reflect fluctuations in the price level as well as the purchasing power of the Rand.

There are two basic types of inflation, namely: cost-push and demand-pull inflation. Cost-push inflation is caused by an increase in the cost of production. Increases in the cost of labor, raw materials, equipment, and borrowing money push the cost of production up resulting in higher overall prices. Demand-pull inflation is caused by an increase in demand or in the supply of money. This increased demand allows producers to charge higher prices.

A lot can be learnt from this economic indicator. High levels of inflation indicate an unp...

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...zon. (Mishkin F, 2000)

Inflation Targeting makes inflation (rather than output or unemployment) the primary goal of monetary policy. This thus makes it evident why some trade unions may not agree with this regime. Although not an intermediate goal of the monetary policy, low and stable inflation is supportive of sustainable growth and employment creation.(SARB, 2005)Inflation targeting has played an important role in strengthening the effect of forward-looking expectations on inflation. I believe the introduction of inflation targeting has benefited the implementation of monetary policy in our country. The application of this framework has strengthened the SARB's focus on price stability and assisted inflation down to low and manageable levels. It has also provided an anchor for expectations of future inflation, which influences price and wage setting. (SARB, 2005)
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