as they provide an opportunity for two - way dialogue on monetary policy. i also appear periodically before parliament. the fact that the inflation target is decided upon by the cabinet has served to ensure the correct monetary and fiscal policy mix from the outset. it means that the cabinet in effect agrees that if fiscal policy is changed, monetary policy would probably also have to change in order to offset any stimulus ( or restraint ) flowing from fiscal policy. inflation targeting has in effect introduced a pre - commitment strategy and probably explains why countries that have adopted this particular approach to inflation targeting are less often characterised by public disagreements between the respective fiscal and monetary authorities. interestingly, every single country that has adopted an inflation - targeting framework has up to the present continued to adhere to it. in south africa the inflation target has strengthened forward - looking inflation expectations in most sectors of the economy and therefore contributed to a weakening of the weight of past inflation. although some commentators remain stubbornly backward - looking and more than a few journalists initially continued to predict the monetary policy stance on the back of the most recent cpix or ppi data, inflation expectations dampened significantly with the new policy strategy and cpix inflation fell from a peak of over 8 per cent in august 2000 to below 6 per cent in october 2001. some economists and a number of journalists had continued to focus on the " unrealistically " narrow and low inflation target of the reserve bank but at the same time had stressed the need for unions to moderate wage demands to avoid increases in unemployment. this in itself contributed to a more forward - looking approach to wage outcomes in general and, throughout much of last year, wage moderation and productivity gains served as important cushions that absorbed some of the inflationary impact of the currency depreciation. a number of critics of the new framework have argued that inflation targeting is an untested framework, as no major adverse shocks have put strain on the achievement of low and stable inflation in many inflation - targeting countries. this is incorrect as many inflation - targeting countries are small open economies that have been subject to severe shocks in the aftermath of the 1997 asian crisis. the combined adverse financial and terms - of - trade shocks suffered by australia, chile, israel and new zealand, among others, led to major exchange rate depreciations in these countries which significantly tested the attainment of their inflation targets. although inflation in these countries initially accelerated again in the aftermath of currency depreciation, they weathered this storm successfully and recorded less - than

central banks ( or what governor mervyn king of the bank of england has termed “ inflation nutters ” ) would give no weight to short - term output considerations in the conduct of monetary policy. most central banks, including the sarb, regard themselves as flexible inflation targeting institutions. by this we mean that there is factored into our decision - making systems concern about what the output costs of our monetary policy actions are going to be. in the jargon of economists, there is some weight on output variability in the bank ’ s objective function. the inflation objective is not discarded, but rather there is a more pragmatic approach to the speed with which inflation is brought back to within the target range. however there is a trade - off between an excessively long period, which would reduce credibility and raise questions about the commitment of the monetary authorities to low inflation, and an excessively short period in which real costs may be high. the rest is judgement for which a central bank must and shall be held accountable. inflation targeting has been an increasingly popular framework since it was first adopted by new zealand in 1990. most studies have shown that it has been a useful framework for assisting in bringing down and maintaining inflation at low levels. currently inflation targeting is probably facing its most severe challenge, as international oil prices have quadrupled since the beginning of 2004, and global food and other commodity prices are experiencing persistent strong increases. whereas a few years ago most countries were within their inflation targets, this unfortunately and regrettably is not the case today. the latest data show that 3 out of 7 industrial countries, and 4 out of 16 emerging market economies are within their targets, although the extent and persistence of the deviation differs somewhat. does this mean that inflation targeting has failed? the true test of the framework will be whether inflation expectations can be sufficiently anchored to weather the current inflationary pressures, and facilitate a return to within the officially set targets. 3. dealing with shocks the nature of the original cost pressures that are facing the economy is well known. these pressures – food and energy – do not appear to be cyclical. this might be a debatable assertion. we are facing a significant and probably a permanent change in relative prices globally. we also have to be concerned about pricing and unit labour cost responses to these relative price changes. if producers simply pass on these increases, and if wages increase to compensate labour for these increases without higher levels of productivity growth, and if we allow this process to take effect