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Inflation forecasts are modelled as monotonically diverging from an estimated long-run anchor point, or “implicit anchor”, towards actual inflation as the forecast horizon shortens. Fitting the model with forecasts by analysts, businesses and trade unions for South Africa, we find that inflation expectations have become increasingly strongly anchored. That is, the degree to which the estimated implicit anchor pins down inflation expectations at longer horizons has generally increased. Estimated inflation anchors of analysts lie within the 3–6 percent inflation target range of the central bank. However, the implicit anchors of businesses and trade unions, who are directly involved in the setting of wages and prices that drive the inflation process, have remained above the top end of the official target range. Possible explanations for these phenomena are discussed.

Monetary policy --- Inflation (Finance) --- Finance --- Natural rate of unemployment --- Monetary management --- Economic policy --- Currency boards --- Money supply --- Inflation --- Labor --- Money and Monetary Policy --- Forecasting --- Price Level --- Deflation --- Central Banks and Their Policies --- Labor-Management Relations, Trade Unions, and Collective Bargaining: General --- Monetary Policy --- Forecasting and Other Model Applications --- Wages, Compensation, and Labor Costs: Public Policy --- Macroeconomics --- Trade unions --- Monetary economics --- Economic Forecasting --- Labour --- income economics --- Labor unions --- Inflation targeting --- Economic forecasting --- Wage setting --- Prices --- Wages --- South Africa

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This Selected Issues paper investigates the impact of exchange rate movements on private consumption in Uruguay. Uruguay is a highly dollarized economy, which makes the relationship between exchange rate movements and private consumption particularly complex. The paper shows that a large share of Uruguayan households is liquidity constrained, which allows the transitory real income shocks brought about by exchange rate pass-through to have a significant impact on consumption. Moreover, exchange rate pass-through is highly heterogenous, with relative prices of durables increasing (decreasing) following a depreciation (appreciation). This creates incentives for households to engage in intertemporal substitution where they buy durables when they are relatively cheaper. Data from Input–Output tables show that Uruguay produces a nontrivial amount of the tradable, durable goods it consumes, opening the door to contractionary depreciations. The results offer a potential explanation for the often noted ‘excess volatility of consumption’ in emerging markets for the case of Uruguay.

Inflation (Finance) --- Finance --- Natural rate of unemployment --- Foreign Exchange --- Macroeconomics --- Money and Monetary Policy --- Public Finance --- Production and Operations Management --- Macroeconomics: Consumption --- Saving --- Wealth --- Aggregate Factor Income Distribution --- Human Capital --- Skills --- Occupational Choice --- Labor Productivity --- Monetary Systems --- Standards --- Regimes --- Government and the Monetary System --- Payment Systems --- Currency --- Foreign exchange --- Public finance & taxation --- Labour --- income economics --- Monetary economics --- Exchange rates --- Consumption --- Income --- Labor productivity --- Private consumption --- National accounts --- Production --- Economics --- Monetary policy --- Industrial productivity --- Uruguay