Monetary policy, inflation and distributional impact: South Africa's case

This paper presents further empirical support for the finding that the impact of inflation and that of policy instruments to manage inflation are not distributed equally across households of different income groups. In particular, the evidence using South African data suggests that monetary policy tightening, which seeks to maintain low and stable inflation, has a relatively modest effect on real consumption of poorer households, who tend to rely on government grants and spend larger shares of income on food stuff, while the reduction in real consumption of wealthier households is much larger. This may be due to the fact that low and stable inflation help maintain the value of government grants and cap food prices both in real terms, and higher interest rates reduce labour income, weaken asset price performance and increase debt service cost.