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South Africa's motor vehicle import prices and the Rand
Date: 27 July 2018 Category: Economics |
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We take a look at South Africa's motor vehicle import prices, which tracks the inflation of imported motor vehicles and plot it against the movements of the Rand.
Idea is to compare the growth of motor vehicle import prices to the depreciation or appreciation movements of the exchange rate in order to determine whether exchange rate movements have a meaningful impact on motor vehicle import prices. |
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Are motor vehicle imports becoming more expensive?
The line chart below shows the year on year movements in South Africa's motor vehicle import price index as well as the year on year movements in South Africa's exchange rate (where a positive movement recorded is a depreciation of the Rand against the US dollar). For example the Rand moving from R10 to R11 over the course of the year is depreciation and will show as a 10% increase in the graphic below.
From the line chart above it is clear that the underlying trends in the movements of the exchange rate and that of the motor vehicle imports price index is very similar, even though the magnitude of the movements differs substantially. The problem for South African consumers is the fact that once a vehicle retailers decided to increase the price due to the cost increases caused by a weaker exchange rate, that retailer will be hard pressed to drop the price if the cost of importing it becomes cheaper if the exchange rate appreciates against the Dollar. The term for prices that are quick to go up and slow to come down (if at all) is called "sticky prices". And why would a retailer bring the price back down when importing the vehicle becomes cheaper? Retailers keeping prices high or even increasing it even though the cost of importing it became cheaper means that retailer will have thicker profit margins. And contrary to popular belief, vehicle manufacturers and sellers are actually in the business of making money. But the aforementioned only holds if the economy is doing well and there is strong demand for vehicles or goods being sold. What happens if import prices do increase substantially but local sales of vehicles are already struggling? Can retailers still get away with increasing prices? Well they probably still increase prices but at a rate lower than the increase in import prices just to offset some of the increased costs.
The graphic below contains the same data as the above graphic, but in this case the year on year rate of inflation of new vehicle sales have been added to the graphic. And one will immediately notice the year on year growth rate is far more subdued, but also far less volatile. It does not show the rapid up and down movements shown by the exchange rate and import prices for vehicles.
The graphic below contains the same data as the above graphic, but in this case the year on year rate of inflation of new vehicle sales have been added to the graphic. And one will immediately notice the year on year growth rate is far more subdued, but also far less volatile. It does not show the rapid up and down movements shown by the exchange rate and import prices for vehicles.
The above graphic shows that there is an element of "sticky" prices in new vehicle prices, as prices do not come down or decline nearly as fast as that of the exchange rate or motor vehicle import price index. In fact over the time period the exchange rate and motor vehicle import indices were in negative territory (i.e a stronger exchange rate lead to vehicle imports becoming cheaper), yet new vehicle sales inflation did not enter negative territory once. Showing that even if the good becomes cheaper to import (year over year), the price of the vehicle will still increase year over year.