A new measure of underlying inflation for South Africa, termed the persistent and common component of inflation (PCCI), has been introduced. The PCCI suggests that inflation pressures in the domestic economy are elevated, with outcomes remaining closer to the upper limit of the target band over the past year.
The information content of the PCCI is comparable to other measures of underlying inflation, such as core and trimmed mean inflation. All three measures currently indicate that the persistence of headline inflation above the 4.5% midpoint partly reflects elevated underlying inflation.
Reliability assessments demonstrate that the PCCI has high predictive power on headline inflation, is stable, and less volatile than headline inflation. Future work will involve estimating the PCCI using other methods to further test its validity—whether it accurately measures underlying inflation—and reliability—whether it does so consistently.