The South African Reserve Bank (SARB) published an economic note estimating that a sustained 30% fuel price increase would have substantially larger and more persistent effects on firms’ inflation expectations than a temporary shock. Higher expectations would also contribute more to headline inflation, although transmission depends on firms’ ability to pass increased costs to customers. The analysis focuses on conditions in which firms pay close attention to inflation. Under the sustained scenario, fuel prices remain 30% above their initial level for three quarters before gradually declining. Firms’ inflation expectations two years ahead, the monetary policy horizon, rise by a peak of 0.65 percentage points after five quarters, compared with 0.15 percentage points under a temporary shock. The sustained shock’s effect on expectations dissipates only after eight quarters. A stylized Phillips curve simulation estimates that the resulting contribution to headline inflation through expectations peaks at 0.5 percentage points after six quarters, compared with a contribution of 0.12 percentage points over eight quarters under the temporary shock. Transmission varies across sectors because margins, competition and customers’ sensitivity to prices constrain firms’ ability to raise prices. Prolonged cost pressures erode the buffers available to absorb increases, making transmission to consumer prices more likely. The simulation isolates the expectations channel and excludes other inflation channels and feedback from inflation to expectations, limiting its coverage of the total inflationary impact. The note concludes that monetary policy may need to remain tighter for longer to keep inflation expectations anchored.
South African Reserve Bank research estimates sustained fuel price shock raises firms’ inflation expectations by 0.65 percentage points
South African Reserve Bank research estimates that a sustained 30% fuel price increase raises firms’ inflation expectations two years ahead by up to 0.65 percentage points, compared with 0.15 percentage points for a temporary shock. The simulated contribution to headline inflation through expectations peaks at 0.5 percentage points under the sustained scenario. Prolonged cost pressures weaken firms’ ability to absorb higher costs, and the note concludes that monetary policy may need to remain tighter for longer.