Pass-through and bias in South Africa's household inflation expectations

Working paper 935

Abstract

This paper uses data from Statistics South Africa’s Income and Expenditure Survey (IES) and the Bureau for Economic Research’s (BER) Household Inflation Expectations Survey to assess the relationship between expenditure shares and inflation expectations across four income groups within the household sample. We investigate whether the responsiveness of inflation expectations among South African households is proportional to the income allocated to different expenditure categories. We also examine how inflation expectations differ in the face of increasing versus stable inflation, shedding light on the role of the inflation environment in expectations formation. Our findings contribute to understanding inflation expectations biases in an emerging market context and have important implications for monetary policy. We find that food inflation for high-income households exhibits a pass-through effect that exceeds their food expenditure share, suggesting an overweighting of food price changes when forming their expectations. At the same time, pass-through coefficients for housing and utilities inflation are consistently lower than expenditure shares across all income groups. We find that households' inflation expectations in South Africa are biased relative to their own expenditure baskets. The pass-through of the price of goods that comprise a relatively large proportion of their baskets reflects an over- or underreaction to these relatively salient prices.