Inflation Dynamics in South Africa

Policymakers know that restrictive monetary policy actions are associated with subsequent output loss and sacrifice ratios. However, the attainment and reinforcement of the primary mandate of price stability is equally important. What are the cumulative losses of output and sacrifice ratios associated with a 1 per cent permanent reduction in inflation during disinflation episodes? How does inflation persistence relate to output losses and sacrifice ratios in these periods? Does the excessive exchange rate depreciation, food inflation during excess of 6 per cent and inflation expectations propagate disinflationary shocks and output costs? This chapter determines the magnitudes of the cumulative losses associated with disinflation episodes due to inflation persistence, excessive exchange rate depreciation, food inflation and inflation expectations. Evidence shows that policymakers should strive to anchor inflation expectations to well within the target range. This assists in lowering inflation persistence, discourages increased reliance on backward-looking inflation expectations and yields lower disinflation costs. In addition, having lowered inflation policymakers have a very compelling case to keep inflation stable within the target range.

The achievement of the primary objective on a sustainable basis implies tough choices regarding the output and inflation trade-off. The policy choices open to policymakers are depicted in movements along the efficient policy frontier or the Taylor curve. This chapter estimates the Taylor curve for South Africa and explores whether the curve has shifted over time. In addition, we identify periods that were associated with minimum inflation and output volatility. Evidence shows that the Taylor curve shifted inward under the inflation targeting regime relative to the pre-inflation targeting period. The implication is that the inflation and output volatilities were minimised and macroeconomic performance was superior. Furthermore, positive shocks to inflation expectations, in particular increases above 6 per cent, shift the Taylor curve outward. The policy implication is that unanchored inflation expectations result in outward shift in the Taylor curve.

To what extent does the exchange rate volatility shift the Taylor curve? Does it matter whether the exchange rate volatility is permanent or transitory or not? Evidence shows that the exchange rate volatility impacts the Taylor curve. Furthermore, evidence shows that shocks in 1997–1998, 2001 and various rounds of Quantitative easing (QE) phases resulted in an increase in the volatilities and covariance of inflation and the exchange rate. Domestic factors tend to propagate and accentuate the exchange rate effects.A persistently rising exchange rate volatility shock leads to pronounced positive correlation between inflation and output gap volatilities. Inflation and output gap volatilities increase due to a higher level of exchange rate volatility. The policy implication is that policy authorities should implement a policy stance that will shift the policy frontier curve to one consistent with lower inflation and output gap volatilities.

Does inflation volatility react in a non-linear manner to inflation shocks? Evidence shows that positive inflation shocks exert non-linear effects on inflation. Large and unexpected positive and negative inflation shocks impact inflation volatility and output growth even more. Unexpected positive inflation volatility shocks lower output growth uncertainty.

This chapter explores the relationship between the exchange rate and inflation volatilities. The objective is to explore the hypothesis that exchange rate volatility contributes to inflation volatility. Evidence indicates that elevated exchange rate volatility shock is passed-through to inflation volatility end the sentence after volatility. and start a new sentence with The exchange rate depreciation shock has a more pronounced effect on overall and permanent volatility than transitory volatility components. The policy implication is that elevated inflation volatility introduces a policy trade-off towards a zone that is not compatible with the inflation targeting framework. This means that policy initiatives aimed at reducing the exchange rate volatility will reduce the welfare costs of the variability in the inflation rate.

Does the volatility of the R/US$ exchange rate matter for the response of inflation to the depreciation? Are there threshold and non-linear effects? This chapter estimates the exchange rate volatility threshold and establishes evidence that inflation remains elevated for longer periods and the rand exchange rate remains highly depreciated in the high volatility regime. The persistence of the rand depreciation shock matters as inflation rises to high levels for longer horizons due to persistent rand depreciation shock in both volatility regimes.The accumulation of foreign exchange reserves plays a role in appreciating the exchange rate, lowering both the permanent and overall exchange rate volatility. At the same time it lowers inflation. The policy implication is that it lessens the burden of adjustment on the repo rate whilst supporting the price stability mandate. Thus the accumulation of foreign reserves should be seriously considered as a complementary policy tool. A reserves accumulation complementary policy approach can induce additional benefits of reduced welfare costs of elevated inflation, hence minimising the policy trade-off.

Is there a threshold beyond which exchange rate depreciations are no longer beneficial to price and macroeconomic stability? What are the policy implications of zero and nonzero thresholds of exchange rate depreciation for the response of inflation to exchange rate shocks, and do the effects depend on whether the shock is persistent or not? In this chapter we conduct the analysis of the exchange rate depreciation effects by considering (i) a zero threshold, (ii) the 9 per cent threshold equivalent to R1/US$ established by the modified Balke (2000) VAR approach and the median box whisker plot, and (iii) the 15 per cent equivalent to R1.65/US$, which is 75th percentile in box whisker plot annual rand changes.Evidence shows that inflation rises very much to rand depreciation shock in depreciation regimes than in an appreciation regime. The rand depreciation shock leads to elevated inflation pressures. There are asymmetric exchange rate effects above 15 per cent rand depreciation threshold. Peak inflation responses are bigger in absolute value to rand depreciation shock than to an appreciation shock. Thus policymakers should expect the inflation to remain slightly elevated above the threshold due to depreciation shock compared to inflationary pressure subsiding to an appreciation shock.

This chapter looks at the relationship between relative services price dispersion and the various aspects of inflation dynamics. The weight of services within the consumer price basket is slightly more than 50 per cent and a majority of the components of services prices display persistent trends which are normally well above the inflation target band. The electricity price increases in recent years is also seen as a key contributor to the degree of persistence and the trajectory of overall inflation. Evidence shows that there is unidirectional causality from inflation to relative services price dispersion. The turning point and threshold at which relative services price dispersion is minimised has systematically declined from high levels in the pre-inflation targeting period to within the inflation target band.Evidence indicates that relative services price dispersion is driven by trend (expected) inflation supporting the menu costs theory. Thus, firm-specific menu costs lead to staggered price setting, thereby distorting the relative prices and inefficiently increasing relative price dispersion (RPD) of services prices. There is lack of evidence that indicates inflation volatility is a big driver of relative services price dispersion. In addition, evidence shows the direct effects occur of electricity prices on the price dispersion, the indirect effects via trend inflation and the inflation volatility channels. The policy implication is that monetary policy can affect relative services price dispersion by lowering trend or expected inflation to within the target range. Policy initiatives that reduce unexpected inflation will minimise the distortionary effects of high realised inflation in allocating resources and welfare.

Policymakers do not observe shocks individually. This chapter assesses the net effects of the concurrence of negative terms-of-trade and oil price shocks on inflation, and the response of the policy rate. Evidence is presented to show that the adjustment of the trade balance to positive terms-of-trade shocks is consistent with the Harberger-Laursen-Metzler (HLM) effect. This means that the adjustment of the trade account is characterised by the dominance of the consumption-smoothing effect over the investment effect. Therefore, growth in terms-of-trade does not necessarily induce agents to significantly alter the capital stock.The net effects of negative terms-of-trade and oil prices shocks indicate that a decline in oil price cushions GDP and consumption. But the positive net benefits of the oil prices on consumption are very transitory. The depreciation of the real effective exchange rate (REER) coincides with positive contributions to GDP and consumption. But the REER depreciates for more than a year, which is long enough to lead to highly persistent inflationary pressures. The repo rate tightens in response to the expected inflationary pressures associated with the depreciation in the REER.Is monetary policy constrained by terms-of-trade shock? Based on the threshold effects of terms-of-trade, evidence shows terms-of-trade shocks are not a binding constraint on monetary policy. Policymakers are able to execute their mandate in pursuit of price stability irrespective of terms-of-trade regimes.

Evidence in this chapter establishes different effects between total tax revenue and final consumption expenditure by government. We find similar effects between taxes on income and tax on goods and services. GDP growth declines more when total taxes are not shut off than when they are shut off. What about the role of the fuel levy and VAT on GDP growth and monetary policy tightening shocks? GDP declines more when the fuel levy and VAT are not shut off than when they are shut off. Evidence suggest that taxes on income, tax on goods and services, increased fuel levy and VAT accentuate the effects on monetary policy tightening shocks on the decline in GDP growth. Evidence indicates that since 2013 the counterfactual inflation rate exceeded the actual inflation suggesting the dominance of final consumption by government over total tax revenue.Nonetheless, evidence shows that monetary policy is tightened by increasing the repo rate to curb inflationary pressures irrespective of developments in the tax components. But, the degree to which repo rate rises varies given differing amplifying abilities of the tax components.

The chapter assesses the extent to which public expenditure impacts the exchange rate pass-through to inflation and the response of the repo rate. Evidence suggests that inflation would increase more due to rand depreciation shock in the presence of growth in public expenditure. The repo rate rises but the increase is slightly lower than what it would be when growth in public expenditure is shut off. The findings indicate that monetary policy is tightened in response to inflationary pressures.

This chapter explores the role of labour productivity and unit labour costs (ULC) in transmitting inflationary pressures and repo rate responses to inflation. Evidence shows that increases in labour productivity play an important role in dampening inflationary pressures directly and indirectly via the propagation effects. Labour productivity and ULC exert opposite effects on size of the adjustments of the repo rate to positive inflation shocks. Positive labour productivity shock lowers inflation and the increase in unit labour costs results in a quick recovery in inflation. Furthermore, persistent labour productivity shocks lower inflation for prolonged periods. The implication is that inflationary pressures would subside more when there are persistent improvements in labour productivity.However, in the presence of positive inflation shocks and weak labour productivity growth does not mitigate inflationary pressures. The degree to which labour productivity neutralizes inflationary pressures shows the speed and magnitude of the repo rate adjustment to positive inflation shocks.

This chapter extends the analysis of labour market indicators on inflation and repo rate adjustments by estimating various labour market conditions indices. Evidence shows that labour market conditions play an important role in the transmission and propagation of inflationary pressures and inflation expectations. The propagation role of labour market conditions is potent when labour market conditions are loose and inflation is above 6 per cent. As a result the policy rate is tightened aggressively when inflation is above 6 per cent and when labour market conditions are loose. In contrast, the policy rate adjustments are less aggressive when the labour market conditions are tight.Evidence in the paper suggests that labour market conditions benefit from price stability and vice versa. Tight labour market conditions shocks lower inflationary pressures, and more so when inflation exceeds 6 per cent. In turn, the pace of the repo rate adjustments to inflationary shocks is slower and muted. This is consistent with the mandate of flexible inflation targeting.

In light of the decline in global trade, import prices, oil prices and other commodity prices, this chapter revisits the role of positive global import growth shocks and how they amplify domestic inflationary shocks. Evidence shows that positive global import growth shocks propagate domestic inflation responses. The counterfactual scenarios show that the simultaneous occurrence of exchange rate, oil price, other commodity price and break-even inflation expectation shocks propagates the impact of positive global imports growth shock on domestic inflation.Furthermore, the counterfactual scenarios show that, indeed, the subdued state of the global economic growth has resulted in muted inflationary pressures. External shocks emanating from advanced, emerging market and developing economies have played a meaningful role in keeping domestic inflation within the target band. In addition, evidence indicates that the current state of the global economy does have an impact on the speed at which the repo rate responds to domestic inflationary pressures. The pursuit of the mandate of price stability is not constrained by global import growth but the pace of repo rate adjustment differs depending on whether these are considered or not.

This chapter shows evidence of non-linearity in exchange rate pass-through (ERPT) to import price inflation introduced by the exchange rate depreciation threshold of 0.28 per cent. There is high persistence of import price inflation in a higher exchange rate depreciation regime and import price display asymmetries to large depreciations or appreciations shocks above the exchange rate threshold. At the same time, GDP growth amplifies the responses of headline inflation to import price inflation more than the exchange rate. In policy terms, this means that inflation will tend to exhibit more stickiness (persistence) at higher levels in the presence of rand depreciation regimes.

What level of GDP growth leads to asymmetric pass-through of rand against US dollar depreciation shocks to import prices and persistence of import price inflation? This chapter presents evidence that GDP growth amplifies the responses of import price inflation to inflation shocks. Furthermore, we estimate that the GDP growth threshold occurs at 2.1 per cent and leads to non-linear exchange rate pass-through to import price inflation. Import price inflation is more persistent above the threshold. The evidence is consistent with a model of optimizing importing firms, which suggests that degree of exchange rate pass-through is higher during periods of GDP growth. During periods of high growth, firms can increase marks-ups without losing market share. This also indicates that the behaviour of importers’ margins is aligned to changes in the GDP growth rate.

The chapter examines whether different headline inflation bands propagates the response of import price inflation to import demand inflation shock. Evidence indicates that the cumulative propagating ability of inflation is much lower when inflation is below 6 per cent and particularly so when it is below 4.5 per cent. Levels above 6 per cent are bad for inflationary pressures. We assessed the asymmetric effects of inflation on import price inflation. Shocks to deviations from the 6 per cent reveals that big negative inflation shocks lead to larger decline in import price inflation than positive shocks of similar size. This evidence supports the role of low and stable inflation in mitigating the level of import prices inflation and the first stage of the exchange rate pass-through (ERPT) in supporting other macroeconomic policies.In addition, the threshold beyond which inflation leads to different ERPT is 5.66 per cent and lies within the 3–6 per cent inflation target band. When inflation is below 4.5 per cent the propagation effects induced by headline inflation are very limited and almost diminished than when inflation is anywhere within the 3–6 per cent target band. This finding confirms that the level of inflation within the target range matters for the definition of what price stability means.

This chapter explores the inflation thresholds beyond which inflation exerts negative effects on the growth–finance nexus. We use a number of econometric techniques to establish the inflation thresholds and test their robustness. The results from various techniques used in the chapter establish the inflation threshold that exerts negative effects in the finance–growth nexus to lie within a range of 4–5 per cent. When inflation is above this threshold range, it exerts a negative effect on the finance–growth nexus. The results are not only robust to the econometric technique used but are statistically significant across various specifications.Furthermore, we establish that failure to take into account the effects of the inflation thresholds underestimates the effects of inflation on growth by 1.5 times. This means that failure to take into account the inflation non-linearities can seriously bias results towards finding a small inflation effect on GDP growth. Results that do not account for inflation thresholds can give a misleading impression that inflation must become quite high before its cumulative effects become important. The policy implication is that policy interventions should be directed at keeping the inflation rate within the target range, and preferably below 4 per cent, to support and enhance a sustainable financial deepening and economic growth.

This chapter looks at the role of the output gap in the exchange rate pass-through (ERPT) to inflation. The objective is to examine the extent to which the output gap non-linearly impacts macroeconomic relationships. Various measures of the output gap confirm that its relationship with inflation varies and is negative post-2009. This means that post-2009 inflation does increase in the presence of a negative output gap. In addition, the output gap threshold indicates that the level of the output gap affects the response of inflation to the exchange rate depreciations shocks. Inflation increases more in the high output gap regimes. The output gap also impacts the policy rate adjustments to inflation shocks. As a result the policy rate responses differ between the low and high output gap regimes. The repo rate is slightly increased to positive inflationary pressures in the low output gap regime, in contrast to the aggressive adjustment in the high output gap regimes. Policymakers do act but are mindful of GDP growth conditions.Evidence indicates that the public spending effects are larger during the extreme recessionary periods than in great expansionary regimes. The policy implication is that there is a role for countercyclical fiscal policy.

This chapter investigates the role of GDP regimes in the exchange rate pass-through (ERPT) to inflation. Evidence shows that GDP growth regimes introduce non-linearity in the response of inflation to rand depreciation. Furthermore, large rand depreciation shocks lead to higher inflation responses than small depreciation magnitudes. Monetary policy reacts to such depreciation shocks but the tightening is influenced by the magnitudes of the pass-through of the rand depreciation shocks to inflation. Large magnitudes of the exchange rate depreciation are accompanied by large inflation rate responses and aggressive monetary policy.The policy implications of the evidence are that the pass-through of large exchange rate depreciations to inflation is neutralised to some degree by the low GDP growth regime. In addition the low exchange pass-through to inflation in the low GDP growth regime is consistent with the menu cost theory of price changes, which suggests that producers subjected to low demand often hesitate to change prices frequently and may absorb a significant portion of cost increases.

The analysis in this chapter shows the asymmetric effects of the policy rate subject to the GDP growth threshold. A GDP growth threshold bounded between 2.3 and 2.4 per cent was established. Evidence suggests that the repo rate exerts significantly different effects between GDP growth regimes. A contractionary monetary policy shock generates a larger reduction in GDP growth than an expansionary shock. Credit frictions play a role during periods of low economic growth and monetary policy affects interest rates and the external finance premium. This means that the effects of contractionary monetary policy are accentuated, suggesting that credit constraints are binding in the low growth regime and therefore play an even more important role as drivers of output growth. In policy terms, the results set out in the chapter show that in low GDP growth regimes a gradual pace of policy tightening both in terms of magnitudes may be an appropriate approach to reinforcing the price stability mandate.

This chapter applies the threshold techniques to examine the role of the inflation regime. Based on the established threshold, we find evidence that a contractionary monetary policy shock has more potent effects relative to an expansionary monetary policy shock in a high inflation regime. Furthermore, an increase in inflation in both high and low inflation regimes has negative effects on economic growth. On the contrary, a decline in inflation has more beneficial effects on economic growth and has a larger impact in a high inflation regime than in a lower inflation regime. Inflation exerts more adverse effects on economic growth relative to the repo rate. In policy terms, the results suggest that inflation thresholds and the non-linear transmission of shocks can assist the policymaker in sharpening the communication and transparency in an effort to lower inflation expectations. The credibility problem cannot be solved by transparency alone.

Low growth and inflation at above the upper band of the target range continue to characterise the monetary policy landscape. In addition, forecast and business cycle indicators of economic activity indicate that growth will remain subdued and can slow down further. Labour market conditions have also deteriorated. With this in mind, we explore whether deteriorating business cycles indicators and tight credit conditions affect the repo rate adjustment to positive inflation shock.Evidence shows that tight credit conditions shock; negative business cycle leading indicator (BCLI) and business cycle coincident indicator (BCCI) indicator shocks reduce inflation for long periods. For example, tight credit conditions and the negative leading indicators shock can lower inflation by 0.3 and 0.15 percentage points, respectively. The policy implications are that the repo rate response to inflation is slightly slower in the presence of tight credit conditions and subdued labour market and economic conditions.

This chapter establishes an inflation threshold that leads to a source of non-linearity in the exchange rate pass-through (ERPT). Findings establish that the ERPT is high when the R/US$ exchange rate depreciates at the time when inflation exceeds the threshold. This suggests that the R/US$ exchange rate depreciation is a significant driver of inflation, especially in episodes when inflation is above the threshold. Furthermore, the inflation regime has an impact on the persistence of the R/US$ exchange rate depreciation shock and inflation persistence. The half-life of the R/US$ exchange rate depreciation shocks in the higher inflation regime is double that in the lower inflation regime. The policy implication of the results is that the inflation threshold around 4 per cent carries economic and welfare benefits in many ways. The pass-through is lower below this threshold and the existing inflationary environment plays a central role.

This chapter investigates the role of sovereign credit spreads on the ERPT by estimating a threshold at which the sovereign credit spreads exert non-linear effects on the ERPT. Evidence suggests that inflation increases more due to persistent rand-US dollar depreciation shocks in the high sovereign spread regime. This means that sovereign spreads play a role in the ERPT to inflation. This evidence implies that the simultaneous occurrence of persistent exchange rate shocks and heighted sovereign spreads requires different monetary policy response relative to the low spread regime. Monetary policy is tightened more in the high sovereign spread regime relative to the small tightening in the low spread regime in order to dampen inflationary pressures from the exchange rate depreciation shocks.

This chapter contributes to the debate on the exchange rate pass-through (ERPT) to inflation by considering the role of credit growth regimes. Regime-dependent VAR and linear threshold approaches were used to determine the extent to which credit regimes impact the pass-through of rand depreciation shocks to inflation. Evidence from the regime-dependent VAR approach and threshold linear regression establishes that rand depreciation shock increases inflation in the high credit regime. Furthermore, the rand depreciation shocks explain more variation in inflation in the high credit regime than in the lower regime.The policy implication is that credit growth below the threshold of 9.5 per cent assists in containing demand-driven inflationary pressures and thus plays a role in neutralising the degree of the ERPT of the rand depreciation shocks to inflation. Within the context of the interaction of price and financial stability it seems to be the case that such a threshold can serve as one of the benchmarks to assess the build-up of potential threats to both policy objectives. In policy perspective, it can assist within the financial regulatory framework as one of the reference points to activate tools aimed at restricting credit-driven demand pressures and overheating, whilst assisting in lowering the degree of the ERPT to inflation in the process.

This chapter assesses the extent to which risks to the inflation outlook in the short term propagate inflationary shocks. Evidence shows that headline and core inflation would have responded differently in the absence of grain price inflation, food inflation, exchange rate, eight-year breakeven inflation, commodity price changes, oil price change and retail sales growth. Before 2007M8 grain prices, food prices, oil prices, credit conditions, retail sales propagated inflation responses to inflationary shocks. But this changed after 2007M8 as these variables pulled down inflation. This means that rand exchange rate propagation effects changed slightly after the recession. The rand and breakeven inflation propagated the inflation responses to inflationary shocks to a large extent prior to the global crisis rather than after the recession in 2009.Post-2007, the credit and demand factors as represented by the credit conditions index and retail sales help in neutralising inflationary pressures. On the other hand, factors such as the oil price, break-even inflation rates, grain and food prices, to the degree that they are associated with the rand exchange rate changes, are making positive contributions and propagating inflationary pressures. However, their contributions to inflation are less relative to that pre-2007, suggesting that the ERPT is muted post-2007 and the main underlying factor is muted demand and credit growth. However, the sharp exchange rate depreciation-induced inflationary pressures have offset the benefits accruing from low demand.

This chapter explores the information content of long-term inflation expectations inferred from break-even inflation rates and the policy implications thereof. Evidence established that actual and counterfactual long-term inflation expectations are “poorly” anchored. Evidence reveals there is pass-through from positive long-term inflation expectation shock to headline CPI inflation. Long-term inflation expectations propagate the adverse inflation shocks into the real economy. Periods of heightened inflationary pressures result in elevated long-term inflation expectations. In policy terms, this suggests policy makers should adopt a policy stance that aims to break down such adverse reinforcing tendencies.

This chapter examines whether the effects of a positive inflation expectations shock differ from those of an adverse aggregate supply shock. This includes assessing the role of positive aggregate demand shock and comparing it to those of the positive inflation expectations shock and an adverse aggregate supply shock. Evidence indicates that the concurrence of the adverse supply shocks and positive inflation expectations shocks can have devastating effects on economic activity. The repo rate is adjusted aggressively to a positive aggregate demand shock. This aggressive increase in the repo rate to a demand shock translates into a quick decline in the response of inflation expectations. Financial market participants do indeed believe that the monetary policy authority deals decisively with positive aggregate demand shocks. Hence, monetary policy conduct may have earned credibility in dealing with demand-driven inflationary shocks. But the absence of demand pressures plays a limited role in mitigating the inflationary effects of supply shocks and inflation expectations.The results differ in relation to the policy responses due to supply shocks and positive inflation shocks. Irrespective of the fact that positive inflation expectations shocks and the adverse supply shocks lead to a persistent rise in inflation expectations and the depreciation in the exchange rate, agents have learned that policy is “partially accommodative” to these shocks. From a policy perspective, the findings reinforce the view that the concurrence of adverse supply shocks and positive inflation expectation shocks tend to move economic variables in the same direction and can have debilitating effects on economic activity. This means that policymakers should take appropriate action when necessary to mitigate that expected prices do not become realised prices.

This chapter assesses the role played by wage growth in excess of 6 per cent and attempts to establish the effect of excessive wage growth on inflationary dynamics and expectations. Evidence establishes that all categories of inflation expectations rise for nearly 11 quarters (almost three years) in response to a positive excess wage growth shock. The half-life of the inflation expectations shock takes nearly takes seven quarters when considering the influence of two-years-ahead inflation expectations. This is three times the half-life when one-year-ahead inflation expectations are considered.Furthermore, an unexpected positive inflation expectations shock raises excess wage growth. There is a strong feedback link between inflation outcomes, inflation expectations and excess wage growth. In addition, evidence establishes that inflation expectations shocks induce cyclicality in the wage setting process. Despite inflation expectation declining marginally, both the public and private sector excess wage growth did not decline, suggesting downward rigidities in the labour market limited the adjustment via the aggregate supply to US QE1 shock. This may point to the prevalence of inflation indexed labour contracts that last for multiyear periods, which is normally three years in the case of the public sector. Based on evidence, such cyclicality aspects are pronounced due to the feedback of transitory inflation shocks on wage indexation.In policy terms, allowing inflation expectation to remain high has the unintended consequences that policy initiatives may not be able to anchor wage growth within the inflation target band. This does not mean it is impossible to achieve sustainable desirable inflation outcomes and well-anchored inflation expectations. This requires policymakers to engage on a persistent drive of “moral suasion” with price setters to discourage the perpetual behavior of wage indexation outside the inflation target band. Furthermore, if the policy objective is to trigger unexpected revision of agents’ decisions regarding future inflation outlook, it is not unusual that certain times necessitate pre-emptive strikes to neutralise inflationary shocks and pressures.