ANALYSIS OF THE NON-LINEAR EFFECT OF PETROL PRICE CHANGES ON INFLATION IN SOUTH AFRICA

Year 2020, Volume: 12 Issue: 1, 34 - 49, 19.02.2020

As Hassan Df Meyer

Abstract

In the South African economy, the phenomenon of high levels of inflation coupled with low levels of economic growth has been experienced over the last decade. In addition to this, the relatively high levels of inflation could be related to rising costs (cost-push inflation) rather than consumer demand (demand-push inflation). One of the factors that contributes to costs and rising inflation in South Africa is fuel or petrol costs. The objective of this study is therefore to determine the non-linear effect of changes in petrol prices on inflation by means of a threshold analysis. The econometric equation included inflation as the dependent variable with the petrol price as the independent variable and GDP as the control variable for the period 2001 to 2018. The Johansen cointegration model was utilised to determine both the long- and short-run relationships between the variables. The methodology also included a threshold analysis to determine at what level of the petrol price inflation is affected to increase significantly over time. The results indicated a cointegration equation with long-run relationships between the variables, while the VECM analysis showed that the effect of petrol price changes was non-linear. Furthermore, excessive increases in petrol prices aggravate inflation levels. A threshold petrol price level was also determined. In the short run, price increases had no significant impact on inflation and economic growth. In conclusion, the continuing increases in petrol prices over the last decade have had a significant and negative impact on inflation and economic growth in the long run in South Africa. In order to keep inflation under control, cost-push factors, including petrol and energy prices, need to be kept at moderate levels or even below the threshold level as determined in this study.

Keywords

Inflation, non-linear effect, petrol price, South Africa, threshold analysis

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