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In this article we take a look at South Africa's import and export prices and compare it to the South African Rand. And what we find is that import and export prices do not behave in the same fashion as the currency. Making us wonder what the actual impact of the Rand is on import and export prices (and thus import inflation and local inflation)
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Behaviour of import, export prices and the Rand
The line chart below shows South Africa's import price inflation, export price inflation, import price inflation excl crude oil and the price movements year on year of the Rand.
A positive percentage reflected for the ZAR shows the currency depreciated (or lost value against the Dollar). So when the ZAR is positive the Rand lost ground against the dollar, and one would therefore expect import prices (the green line) to rise, as the cost of importing goods from abroad became more expensive due to the weaker exchange rate. And the reverse is also expected, if the ZAR shows a negative percentage the Rand strengthened against the dollar and one would expect import prices to fall due to imported goods being cheaper as the exchange rate appreciated (got stronger).
During 2015 the Rand lost substantial ground against the US dollar, yet import prices were negative for the majority of that year. So why is that? Well part of that is due to the lower prices in crude oil. Even though the Rand weakened, crude oil prices were declining and offsetting some of South Africa's import costs. The red line in the graphic above shows import prices excluding crude oil, and this clearly shows during 2015, imported goods excluding crude oil were increasing too, all though at a far lower rate than the exchange rate weakened.
And this makes us wonder just how much of an effect does the weakening of the exchange rate have on "imported inflation". The South African Reserve Bank (SARB) always mention the risk the weakening exchange rate is posing for local inflation, as imported goods become more expensive and these price increases then filter through to consumers and pushes up consumer inflation levels.
Well the graphic above shows that even though the Rand depreciated significantly in 2015, the imported prices (both including and excluding crude) did not reflect price increases anywhere near the levels of the currency depreciation. So is import inflation really such a big deal as the SARB might it out to be? We do not think so. And besides a large chunk of SA imports are machinery and equipment which is likely to push up producer inflation levels and not necessarily consumer inflation.
During 2015 the Rand lost substantial ground against the US dollar, yet import prices were negative for the majority of that year. So why is that? Well part of that is due to the lower prices in crude oil. Even though the Rand weakened, crude oil prices were declining and offsetting some of South Africa's import costs. The red line in the graphic above shows import prices excluding crude oil, and this clearly shows during 2015, imported goods excluding crude oil were increasing too, all though at a far lower rate than the exchange rate weakened.
And this makes us wonder just how much of an effect does the weakening of the exchange rate have on "imported inflation". The South African Reserve Bank (SARB) always mention the risk the weakening exchange rate is posing for local inflation, as imported goods become more expensive and these price increases then filter through to consumers and pushes up consumer inflation levels.
Well the graphic above shows that even though the Rand depreciated significantly in 2015, the imported prices (both including and excluding crude) did not reflect price increases anywhere near the levels of the currency depreciation. So is import inflation really such a big deal as the SARB might it out to be? We do not think so. And besides a large chunk of SA imports are machinery and equipment which is likely to push up producer inflation levels and not necessarily consumer inflation.