Governance, and regional dynamics of inflation persistence: Evidence from South Africa

Working paper 927

Abstract

Regional inflation patterns within a single economy can have important implications for the effectiveness of fiscal and monetary policy. Yet, much of the existing research has focused on cross-country or monetary union dynamics, under the assumption that intra-country regions are sufficiently homogeneous for national policy to transmit uniformly. This assumption may be particularly problematic in countries like South Africa, where significant regional disparities in economic activity, infrastructure, and governance exist — each of which affects how policy is transmitted to the subnational level. This study uses consumer price index (CPI) data from 27 local municipalities between 2008 and 2023 to examine the extent of variation in inflation and inflation persistence across South African regions. Employing an autoregressive model, the study assesses the role of municipal governance, measured by audit outcomes from the Auditor-General of South Africa, in mediating this persistence. The results indicate marked regional differences in both inflation levels and persistence. Regions with lower economic activity tend to experience higher inflation persistence, suggesting a compounding vulnerability for already marginalised populations. Governance quality appears to mitigate inflation persistence, particularly in market-determined prices, while its effect is weaker in administered price categories, likely due to slower adjustment processes. The findings contribute to understanding the sub-national drivers of inflation and inform the development of targeted policy interventions to address regional disparities and enhance overall economic stability in South Africa.