Including inflation in South Africa
What is inflation?
Inflation refers to the rate of increase in the price of goods and services in a country over a given period of time, such as a year.
Put differently, the rise in the price of services and goods causes a decline in the purchasing power of the currency of a country. In other words, the particular currency devalues, meaning fewer goods and fewer services can be bought with the same amount of money.
Typically, inflation indicates the overall cost of living in a country. However, the scope of inflation can also be limited to specific items such as commodities, assets (asset inflation), and wages (wage inflation).
Deflation is the opposite of inflation
Contrary to inflation, deflation occurs when there is a general decrease in the price of services and goods in a country, enhancing the purchasing power of the country’s currency.
Deflation is indicated by a negative rate of inflation when the inflation rate drops below 0%.
Examples of extreme inflation
Stagflation
The term stagflation is a combination of two concepts: stagnation and inflation.
Stagflation is an unusual economic occurrence. It happens when the economic growth rate of a country is stagnant and its unemployment rate is rising, but the inflation rate remains high.
It is typically caused by government policies that interfere in and disrupt normal economic principles.
Hyperinflation[1]
In 1956, Phillip Cagan, an economics professor from the U.S.A., recommended that inflation is considered hyperinflation when the rate of inflation rises above 50% a month.
Venezuela is the most recent example of a country that struggles with hyperinflation – a staggering inflation rate of 65 000% in 2018.
Zimbabwe is a classic example of hyperinflation. From March 2007 to mid-November 2008, the country reported extreme inflation. A whopping inflation rate of 79 600 000 000% in November 2008 – the equivalent of a daily inflation rate of 98%.
Types of inflation
Creeping inflation
Creeping inflation, also referred to as moderate inflation or mild inflation, occurs when the rate of inflation slowly rises over a period of time. Typically, when the price of goods and services increases 3% a year or less.
During mild inflation, consumers expect that prices will keep rising. Hence, demand for products and services increases, stimulating economic growth.
Walking inflation
Walking inflation refers to an inflation rate between 3 – 10% a year. It is higher than creeping inflation (3% a year and less), but lower than running inflation (10 – 20% a year).
Walking inflation can be harmful to the economy of a country because it speeds up economic growth too fast. Consumers are inclined to acquire more than they need in order to avoid much higher prices in the future.
Running inflation
Running inflation surfaces when inflation begins to rise at a considerable rate. Typically, a rate is between 10 – 20% a year. At this rate, inflation threatens the economy of a country, causing prices to rise significantly.
Galloping inflation
Running inflation is sometimes called galloping inflation, describing an inflation rate of 10% a year or more.
There is no overall definition of galloping inflation. Different boundaries are set by economists and analysts, such as:
- Inflation of 10% a year or more.
- Inflation rate between 20% and 100% a year.
- Rate of inflation between 20% and 1 000% a year.
Regardless of the scope of galloping inflation, it provides a country with a serious economic problem, causing an extreme challenge to the authorities of a country to bring it under control.
Causes of inflation
As mentioned, inflation occurs when the price of goods and services is gradually rising. Investopedia describes ‘an increase in the supply of money’ as ‘the root of inflation.’
Gradually increasing prices related to inflation are based on two economic processes, namely demand-pull inflation, and cost-push inflation. Both processes are subject to the economic laws of supply and demand.
Demand-pull inflation
Demand-pull inflation, also called the demand-pull effect, occurs when the demand for goods and/or services increases at a faster rate than the supply of goods and services.
Consumers have more money available to spend, creating a demand-supply gap – an increased demand with lower supply to cope with the rising demand, resulting in higher prices.
Typically, when demand exceeds supply, manufacturers and providers of services will respond by rising prices (pulling up prices).
The demand-pull effect can also occur on a smaller scale when the manufacturer of a popular product is not able to keep pace with the demand for the specific product.
Cost-push inflation
Cost-push inflation, also known as a cost-push effect, occurs when the supply of services or goods is restricted or limited in some way while demand stays the same – pushing up prices.
Typically, an external negative event, such as a natural disaster or pandemic (Covid-19), can impede a businesses’ ability to manufacture enough of certain products to continue to satisfy consumer demand.
Such a situation allows manufacturers to increase the prices of products, resulting in inflation.
For instance, if OPEC (Organisation of the Petroleum Exporting Countries) decides to cut back on oil production, the oil price rises because demand remains relatively the same, even as supply is reduced. This can have a domino effect, causing a rise in transportation costs and contributing to increasing consumer prices.
Calculating inflation
The inflation rate is typically calculated by measuring changes in a specific price index. Two commonly used indexes to calculate inflation are the Consumer Price Index (CPI) and the Producer Price Index (PPI).
These two indexes are also used in South Africa to calculate the country’s inflation rate.
Tradingeconomics.com describes PPI In South Africa as the index that ‘measures the average change in the price of goods and services sold by manufacturers and producers in the wholesale market during a given period.’ (Accentuation by the article writer.)
Consumer Price Index (CPI)
Simply put, the Consumer Price Index (CPI) measures the weighted average of a basket of goods and services that consumers spend the most money on. The basket forms the basis from which the CPI is calculated.
Based on the CPI, inflation can be reported as headline inflation or core inflation.
- Headline inflation refers to the change in the value of all the goods and services in the CPI basket.
- Core inflation excludes items that can change significantly in price from month to month, such as food and energy (gas and other fuels).
The inflation rate is calculated by dividing the price of a CPI basket of goods and services in a particular period by the price of the basket in its base period. It is expressed as a percentage.
(The base year of an index is the year with which the values from other years are compared. The index value of the base year is normally 100.)
Calculation of the Consumer Price Index (CPI) in South Africa
Congruent to multiple other countries, the CPI is the most familiar price index in South Africa.
Statistics South Africa commonly referred to as Stats SA, is responsible for the calculation of the country’s CPI.
Currently (October 2025), the base year of the CPI is 2016.
Changes in the CPI basket in 2016
In January 2017, Stats SA supplied the following information regarding changes to the country’s CPI basket of goods and services in 2016.
Stats SA refers to the basket of goods and services as the inflation basket.
Noteworthy are the following details obtained from the SA Stats document.:
- The changes to the inflation basket ‘provide interesting insight into how consumer spending patterns have shifted over the last four years.’ (Accentuations in quotations from the SA Stats document are by the article writer.)
- The CPI is calculated monthly.
- The basket of goods and services comprises ‘products and services that households spend the most money on,’ as identified by Stats SA.
- The basket increased from 396 products and services to 412.
- The following items, amongst others, have been removed from the adjusted inflation basket:
- Blank CDs and blank DVDs.
- Pre-recorded DVDs.
- Postage stamps.
- Tennis balls.
- Teapots.
- Electric fans.
- Tinned peas.
- Spreads such as Bovril and Marmite.
- Fees (ward and theatre) in public hospitals.
- Board games.
- Reflecting the changes in consumer spending, SA Stats has included, inter alia, the following items in the inflation basket:
- Convenience foods like frozen pastry products (such as pizza and pies), instant noodles, and ready-mix flour.
- Levies regarding sectional titles.
- Car rental.
- Peanuts.
- Pears.
- Chewing gum.
- Toasters
- Coffee mugs.
- Diesel.
Categorisation of goods and services in the CPI basket
The 412 goods and services are categorised into 12 broad groups. In alphabetical order, the groups are:
- Alcoholic beverages and tobacco.
- Clothing and footwear.
- Communication.
- Education.
- Food and non-alcoholic beverages.
- Furnishings, household equipment, and routine household maintenance.
- Health.
- Housing, water, electricity, gas, and other fuels.
- Miscellaneous goods and services.
- Recreation and culture.
- Restaurants and hotels.
- Transport.
The inflation target in South Africa
In South Africa, National Treasury, in consultation with the South African Reserve Bank (SARB), determines the country’s inflation target – currently set as 3% – 6%.
The SARB independently makes and applies monetary policy to achieve the inflation target. Monetary policy is the strategy by which the SARB manages the money supply to achieve its goals.
As a central bank, the SARB uses interest rates to affect the inflation rate.
A brief overview of the inflation rate in South Africa
According to stats obtained from tradingeconomics.com, the annual inflation rate in South Africa averaged 8.7% from 1968 until 2025. It jumped to an all-time high of 20.70% in January of 1986 and reached its lowest level of 0.20% in January of 2004.
In addition, statistical data from Stats SA reflects the following:
- Headline inflation was ‘relatively subdued throughout the lockdown,’ starting on 27 March 2025. The inflation rate dropped from 4.6% in February 2025 to 3.0% in April 2025. The rate reached its lowest figure of 2.1% in 15 years in May 2025.
- Annual headline inflation increased to 4% in April 2025, the highest figure since the start of the lockdown.
- In May 2025, the headline inflation exceeded the midpoint (4.5%) of the SARB’s monetary policy target range, reaching 5.2%. The last time the reading was this high was in November 2018.
- The readings for the annual headline inflation from June 2025 – August 2025 are as follows:
- June 2025: 4.9%
- July 2025: 4.6%
- August 2025: 4.9%
‘This is the fourth consecutive month where the annual increase is higher than the midpoint (4.5%) of the South African Reserve Bank’s monetary policy target range,’ according to Stats SA.
Controlling and reducing inflation
It is the responsibility of the financial authorities of a country to control and reduce the inflation rate in a country.
It is done by following a contractionary monetary policy, aiming to reduce the money supply within a country’s economy.
There are various methods that a central bank, such as the South African Reserve Bank (SARB), can use to reduce a country’s money supply, such as:
- Increase interest rates
In South Africa, the SARB has the mandate to ‘implement the interest rate policy as determined by the Monetary Policy Committee (MPC), with the aim of achieving the SARB’s inflation-targeting mandate,’ according to Fact Sheet 9 of the SARB.
Higher interest rates increase the cost of borrowing, reducing consumer spending. Also, increased interest rates make saving money more attractive.
- Create a liquidity shortage
The South African Reserve Bank (SARB) uses its repo rate[2] and cash reserve requirement for commercial banks to create and maintain a liquidity shortage.
In addition, the SARB uses several types of open market instruments (SARB debentures, reverse repos, and foreign exchange swaps) to manage a liquidity shortage.
[1] See the article, ‘Hyperinflation – Explained for Dummies,’ for more detail about hyperinflation.
[2] Refer to the article, ‘South Africa’s Repo Rate – A Useful Guide,’ for a detailed explanation of the SARB’s repo rate.
