Governance, economic activity, and the geography of inflation persistence in South Africa

South Africa sets monetary policy nationally, but markets, spending patterns and governance, all determinants of inflation vary regionally. In our working paper ( Governance, and Regional Dynamics of Inflation Persistence: Evidence from South Africa ), we use the raw price observations that Statistics South Africa collects to construct consumer price indices for 27 municipalities over 2008–2023. The exercise reveals substantial variation in inflation levels, dynamics, and, critically, persistence across space, and points to local governance quality as a key moderator of how quickly price shocks dissipate. Building inflation from the ground up The national CPI is assembled from price quotes gathered across the country and weighted by a single representative basket. We instead assign each municipality its own expenditure weights and its own set of local price quotes, producing municipality-specific CPIs and the corresponding monthly and year-on-year inflation rates. From these, we derive a persistence score – a summary of how much current inflation reflects its own past – both as a single value per municipality and as a rolling window that tracks changes through time. To make sense of the cross-municipal variation we bring in two observable local features: nighttime light intensity as a proxy for economic activity, and municipal audit outcomes as a proxy for governance quality. We also split each local basket into market-determined prices (set competitively) and administered prices (tariffs, fees, and regulated charges), allowing us to ask whether governance operates differently across these two components. Three headline findings Regional inflation diverges meaningfully. Provincial inflation paths are not the same everywhere, and zooming in further, municipalities within the same province can diverge just as much. These are not transient gaps; the dispersion is visible across the full sample period. Lower-activity areas tend to exhibit more persistent inflation,