We take a look at South Africa's import unit value indices (derived prices for imports) and plot it against the Rand/Dollar in order to see if import prices are affected by Rand weakens, and if we are indeed importing inflation as the Reserve Bank would have the country believe.
UVI's and ZARUSD
So what is a UVI? A unit value (UV) is a derived price, and its derived from SARS customs data which reports the value of shipment as well as either the number of units shipped, or the weight of the shipment. A price is then derived for each commodity. These commodities are then weighted in order to ensure the index that is developed to track these UV's represent the relative importance of the commodities being imported or exported.
The line graph below shows the index levels for total imports and total export UVI's as well as the ZARUSD exchange rate that has been indexed to the same reference period as the UVI's. What is interesting to note is the fact that the import UVI tracked the exchange rate pretty strongly, until about August 2014, and since then continued Rand weakness against the dollar has not lead to corresponding increases in import prices (as one would expect). As the Rand weakens, imported products become more expensive, therefore import prices should increase, but the rate of increase shown by the import UVI does not reflect this. The question then is why?
Well the answer to the above question is pretty simple, while the Rand has been experiencing a tough time, so has the oil price. Oil being South Africa's single biggest import with roughly 18% of total value of South African imports being made up by crude oil. The large weight of crude oil in imports and crude oil's poor performance in recent months, has helped the South African import UVI (for all imports) remain at relatively subdued levels. While other imported product's prices might have risen sharply, the fact that oil has been very negative and carries a big weight in our total imports UVI, the total imports UVI might not reflect strong price increases of other products.
Below the line graph showing the monthly crude oil prices that has been indexed to the same reference period as the UVI's and the same exchange rate as in the line graph above. One can see the clear divergence between the two, as the exchange rate has weakened, so has the oil price.
Crude vs ZARUSD
So yes South African Reserve Bank, while we have imported inflation in the past due to the weak exchange rate, one of our main imports has declined for months on end now, and with it brought some much needed relief from import inflation. The threat of import inflation might not be nearly as dangerous or serious as you might have users believe, especially if UVI's are looked at, at your MPC meetings, which one would hope is the case as it is official import and export prices as published by Statistics South Africa.
One wonders if SARB even looks at all the economic data available when deciding on monetary policy setting (I.e interest rates)? Perhaps SARB's governor needs to report to parliament or some economic finance oversight committee in the same way that the US chairperson of the Federal Reserve does? Just so that Joe soap and the market can get a better understanding of what exactly the MPC looks at before deciding on interest rates. Greater transparency will not only provide greater guidance to the markets and analysts but it will keep SARB's MPC's on their toes as analysts and economists would be able to ask SARB why they not looking at certain variables that they (the analysts or economists) feels should be looked at before deciding on interest rates.