For years South Africa’s inflation debate has revolved around a familiar question: should the Reserve Bank care more about inflation or economic growth and unemployment?
This is the wrong question. The more uncomfortable question is, whose welfare does inflation actually protect? Not all inflation is received equally. A loaf of bread that rises by R2 does not affect a Sandton executive and an unemployed mother in Mdantsane in the same way. The executive barely feels it, while the unemployed mother has to budget with every rand.
Economists have long treated inflation as though it were a single national experience, but this is not accurate or appropriate. Inflation has always been unequal, and this is precisely why the Reserve Bank’s decision to target inflation closer to 3% matters so much.
Many critics have framed the new target as a technical debate between economists, arguing that lower inflation means higher interest rates, weaker growth and fewer jobs. Others celebrate it as a victory for macroeconomic discipline.
Both sides are missing a crucial part of the story. The new target is not simply changing inflation. It is changing who benefits from inflation policy.
Inflation has winners and losers
Central banks present themselves as neutral institutions. Their mandate is price stability. Nothing more. But neutrality is impossible. The moment a central bank chooses an inflation target — whether it is 2%, 3% or 6% — it is making an implicit decision about whose welfare it protects.
Imagine two households. One spends almost everything it earns on food, transport, electricity and rent. The other owns assets, has savings and spends proportionately less on necessities. Now let inflation rise from 3% to 5%. For the second household, life changes little. For the first, every percentage point matters.
Inflation is not merely an economic statistic. It is a tax. And, like many taxes, it falls hardest on those least able to pay. Our research analysed more than two decades of nationally representative household data to answer a simple question: At what inflation rate is household wellbeing maximised?
The answer surprised even us. Household welfare has an inverted-U relationship with inflation. Moderate inflation can coincide with stronger economic activity, higher employment and rising incomes. But beyond a certain point, purchasing power erodes faster than these benefits accumulate, and welfare begins to decline.
The turning point differs dramatically across society. Poorer households reach peak wellbeing at inflation rates just above 3%. Richer households continue benefiting until inflation approaches 5%. The implication is profound. South Africa does not have one optimal inflation rate. It has many.
The old target quietly favoured the rich
For years South Africa operated under a 3%-6% inflation target, with policy generally focused on 4.5%. Most people assumed this was a neutral compromise. It wasn’t.
Our evidence suggests this previous midpoint sat far closer to the welfare-maximising inflation rate of wealthier households than poorer ones. Nobody deliberately designed it that way. Nobody intended it. But that was its effect.
The affluent could comfortably tolerate these inflation levels while they steadily eroded the purchasing power of poorer households. Hence, the policy that was introduced to stabilise prices for everyone inadvertently aligned more closely with the welfare preferences of those already best equipped to cope with inflation. Economists call this a distributional consequence. Everyone else would probably call it unfair.
The Reserve Bank’s decision to pursue inflation closer to 3% has quietly redrawn the map. It did far more than lower an inflation number. It shifted the distribution of welfare. The same evidence that once suggested monetary policy unintentionally favoured richer households now points in the opposite direction.
For perhaps the first time since inflation targeting began in South Africa, the Reserve Bank’s objective sits remarkably close to the welfare sweet spot of the country’s poorest households. That deserves far more attention than it has received. The new target is not simply about achieving lower inflation. It is about deciding who receives the greatest protection from inflation.
Lower inflation is not a silver bullet
None of this means lower inflation will solve South Africa’s deepest problems. It will not eliminate poverty, create jobs, fix Eskom or build houses. A household that cannot afford food today will not suddenly become prosperous because inflation falls from 4% to 3%.
What lower inflation does is stop making an already difficult situation worse. It slows the erosion of purchasing power. It protects wages, pensions and social grants. It gives families greater certainty that this month’s income will still buy next month’s essentials.
Sometimes economic policy is not about making people richer. Sometimes it is simply about preventing them from becoming poorer.
The debate we should be having
The Reserve Bank’s new target raises a question economists have largely avoided. Should central banks judge success only by inflation, GDP and interest rates? Or should they also ask who actually benefits from those outcomes?
For too long monetary policy has spoken the language of averages. Average inflation. Average wages. Average expectations. But there is no average South African. There are households that skip meals when food prices rise. Pensioners who ration electricity. And professionals who barely notice either.
One inflation rate cannot maximise welfare for all of them. Recognising this does not make monetary policy less credible. It makes it more honest. The Reserve Bank’s move to a 3% inflation objective will probably be remembered as a technical adjustment. It is anything but this. Behind the policy technicalities is a subtle shift in whose welfare monetary policy seeks to protect.
For the first time in years, South Africa’s inflation target appears to be aligned with those who have the least room to absorb rising prices.
Inflation has never been equal. Perhaps our inflation target finally shouldn’t be either.
• The authors are economists in the faculty of business and economic sciences at Nelson Mandela University.
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