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We take a look at the latest producer inflation rates in South Africa for both final and intermediate goods and compare it to import inflation levels of South Africa. Are the prices of imports growing at a slower rate than those of local producers? If so one can understand why businesses are rather importing goods instead of buying them from local producers.
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Import inflation lower than local producer inflation?
In recent times we have been fairly critical of the South African government and the fact that they dont do enough to support local industries against increased competition from imports. The clothing and textiles industry is one of those that have been severely hit by continued increases in clothing and textile imports from countries such as China, India and Vietnam.
But one cannot blame businesses looking for the cheapest supplier of goods. Businesses are driven by profit motive and is driven by getting the cheapest supplier and then reselling at the highest price in order to maximize profits for the owners/shareholders of the business in question. So the question we are asking today is whether the inflation rate of goods being imported into South Africa is higher or lower than the producer inflation rates measured for local producers. If import prices are growing at a lower or slower rate than domestic producer inflation one could understand why businesses would rather import instead of buying local. As the import prices aren't growing as fast as local production prices. If it is the other way around one can assume what the seller is importing cannot be produced locally (due to lack of technical know how for example) or is something that is not available locally (such as crude oil)
But one cannot blame businesses looking for the cheapest supplier of goods. Businesses are driven by profit motive and is driven by getting the cheapest supplier and then reselling at the highest price in order to maximize profits for the owners/shareholders of the business in question. So the question we are asking today is whether the inflation rate of goods being imported into South Africa is higher or lower than the producer inflation rates measured for local producers. If import prices are growing at a lower or slower rate than domestic producer inflation one could understand why businesses would rather import instead of buying local. As the import prices aren't growing as fast as local production prices. If it is the other way around one can assume what the seller is importing cannot be produced locally (due to lack of technical know how for example) or is something that is not available locally (such as crude oil)
From the graphic it is clear that since January 2017 the overall inflation rate of South African imports were far lower than the producer inflation rate for both final manufactured goods as well as intermediate goods (goods which will be used in additional production processes). Sure people will argue that crude oil prices has a significant impact on the overall price of imported goods. This is true, and the graphic below shows the same graphic as above but with the imports inflation after crude oil has been excluded.
The graphic above shows that if crude is excluded from the imports inflation that the overall inflation rate of imports would have been even lower. And this points to why more and more local firms are importing goods, as the inflation rate of producers in South Africa (which they will look to pass on to wholesalers and retailers) is growing at a rate a lot faster than the price of imports are growing. So while imports have the downside of hurting local producers, it has the potential upside of saving local consumers money and boosting local firms profits, which in turn could lead to local businesses expanding and employing more people.
So those who see trade and globalisation as just a bad thing, they positives needs to be taken into account too. We get a wider variety of products, often time products of better quality as well as products at a cheaper price than what local firms can produce these products at. Higher electricity prices, high wage demands, low levels of productivity, lack of stable electricity grid, increased direct and indirect taxes all making operating costs of local producers more expensive (as is shown by their relatively high inflation rate) and is pushing more and more firms towards importing goods, as can be seen with the ever increasing Rand value of goods being imported into South Africa.
So those who see trade and globalisation as just a bad thing, they positives needs to be taken into account too. We get a wider variety of products, often time products of better quality as well as products at a cheaper price than what local firms can produce these products at. Higher electricity prices, high wage demands, low levels of productivity, lack of stable electricity grid, increased direct and indirect taxes all making operating costs of local producers more expensive (as is shown by their relatively high inflation rate) and is pushing more and more firms towards importing goods, as can be seen with the ever increasing Rand value of goods being imported into South Africa.