Accounting for Regional Dynamics and Global Influences in South Africa's Inflation Problem

ABSTRACT: Evolving global inflationary pressures, particularly from advanced economies, have revealed new evidence of the international transmission of economic shocks to emerging markets. South Africa, being heavily integrated into global trade, faces rising imported inflation, which conventional domestic policy instruments have struggled to contain and threatens long-term price stability. This study, therefore, focuses on the inflationary impacts on South Africa, exploring how output and price level shocks from key trading partners, including advanced and emerging economies, affect its macroeconomic performance. Using the Global Vector Autoregressive (GVAR) model, this study evaluates the dynamic transmission of foreign output and price shocks to South Africa's inflation between 1990 and 2023. The model integrates quarterly cross-country data for 20 Sub-Saharan African economies and four advanced partners—the United States, the United Kingdom, the Eurozone, and China. Empirical results reveal that foreign inflation and output shocks significantly influence South Africa's domestic price levels. Shocks originating in China, the Eurozone, and the United Kingdom exert strong positive effects on South African inflation, whereas U.S. shocks often display a dampening effect, reflecting global monetary tightening. The cumulative impact of output and price shocks from major trading partners accounts for approximately 43 and 41 percent of domestic inflation variance, respectively. This underscores the sensitivity of South Africa's inflation to global economic activity and trade linkages. Regional spillovers from countries such as Nigeria and Tanzania further accentuate intra-African interdependence, though their relatively weaker trade weights limit the overall magnitude of these effects. The findings highlight the dominance of external over domestic inflation drivers. Policy responses should extend beyond domestic monetary adjustments to include regional and global coordination mechanisms. South Africa must strengthen macroeconomic collaboration under AfCFTA and SADC to develop joint inflation-monitoring systems. Enhancing export diversification, stabilising exchange rate management, and integrating global indicators into the SARB's inflation-targeting model are imperative. Investments in energy and logistics will improve supply resilience, while a credible reserve accumulation strategy will reduce vulnerability to imported inflation and external commodity price shocks.