This is in line with the results presented in Section 3, which showed that it was international factors rather than domestic factors driving South African fuel price changes. In summary, petrol price increases have a direct impact on headline inflation by virtue of its share in the CPI basket. In addition, the granger causality tests show that petrol price increases also have indirect effects on headline inflation by virtue of its impact on other non-petrol prices. The next section will employ econometric techniques to examine the total impact of petrol price movements on headline inflation.
Econometrie analysis of petrol price effects on inflation A better understanding of the relationship between petrol prices and inflation can be gauged by considering a generalised Phillips curve augmented to include petrol price movements and expressed as in Equation 3. As is now well documented in the empirical literature, the ARDL approach has some advantages over other co-integration methods. Firstly, the methodology can be used with both I 0 and I 1 variables. Secondly, the ARDL approach can handle small sample properties.
Finally, the estimation procedure can be used even if the explanatory variables were endogenous. Before undertaking the estimation of the ARDL model, a necessary prior step is to apply the Bounds test to establish if there is a long-run relationship among the variables included in the model.
The Akaike information criterion is used to identify the optimum lag in the model. The Wald F-statistics derived from Equation 4 is a critical part of the ARDL procedure and is used to establish if there is a long-run relationship among the series.
The null and alternative hypotheses for the Wald tests are given by Equations 5 and 6. The computed F-test statistics are compared with the critical values provided by Pesaran et al. In terms of this procedure, the lower bound critical values assume that the explanatory variables are integrated of order one and hence if the computed F-statistic is less than the lower bound value, the null cannot be rejected.
On the other hand, if the computed F-statistics exceeds the upper bound value, then there is a long-run relationship among the variables.
Finally, if the computed F-statistics lies between the lower bound and upper bound, the test is for a long-run association among the variables is inconclusive. On finding evidence of a long-run relationship between variables, one can proceed to estimate the ARDL model, by first estimating the longrun coefficient as in Equation 7. Finally, the short-run dynamic parameters may be obtained by estimating the vector error correction model given by Equation 8.
The empirical analysis starts by assessing the sta-tionarity properties of the variables by applying the augmented Dickey-Fuller unit root test. The 'breakpoint unit root test' is used to account for the structural break in the data. The unit root test results are presented in Table 4. They show that the model contains a mix of stationary and nonstationary variables which makes the ARDL model suitable for the analysis of the pass-through effects of petrol price movements to inflation.
As mentioned earlier, the first step is to use the bounds test to determine if there is a long-run relationship among the variables. Table 5 reflects the F-statistics applied to Equation 4. The lag order was chosen using the Akaike information criterion. The null hypothesis of no co-integration in the model is rejected at the 1 percent level of significance, thus supporting the hypothesis of a long-run relationship among the variables. After having established that there is a valid long-run relationship among the variables, the ARDL method was applied, to estimate the long-run and short-run coefficients.
Panel A of Table 6 indicates that all the independent variables have a significant impact on headline inflation in the long-run. All the coefficients are significant at the 5 percent level with their respective signs conforming to theoretical expectations. More specifically, a 10 percent increase in petrol inflation petrol results in a 1.
The coefficient on the output gap indicates that a closing of the output gap puts upward pressure on headline inflation. The dummy variable is highly significant at the 1 percent level with a negative influence on headline inflation. The dummy variable could in part be capturing the influence of the opening of the South African economy in the democratic era. With the advent to democracy in April , the process of globalisation of the South African economy which began in the early s was speeded up.
Panel B reflects the short-run impact of petrol inflation on headline inflation. The results show that the coefficient on the ECT is negative and statistically significant which confirms a valid short-run relationship among the variables with about 15 percent of the disequilibrium being corrected in each quarter. In the short-run, a 10 percent increase in petrol inflation results in headline inflation increasing by 0. This may be due to sticky price behaviour in the economy, which in effect means that some prices do not adjust downwards once they have increased.
In other words, once non-petrol prices are adjusted upwards following an increase in petrol prices - so called second-round effects - they are sticky downwards. Finally, the diagnostic checks in panel C show that the results are robust.
The LM test for autocorrelation rejected the null of no autocorrelation, testing for heteroscedasticity could not reject the assumption of homoscedasticity, the LM test could not reject the normality assumption and Ramsay's RESET test could not reject the fitted model. Two additional issues of importance relate to the issue of asymmetry and the stability of the petrol price coefficient over time.
Table 7 captures the asymmetry in the pass-through petrol price effects. The results indicate that the coefficient on price increases Petrolpositive is significant with a 10 percent increase resulting in a 1. On the other hand, price declines Petrolnegative do not feed through in the long run indicating that prices are sticky downwards.
The output gap GAP is also significant with the correct sign, implying that capacity constraints in the South African economy exert upward pressures on inflation In order to ascertain the stability of the petrol price coefficient, the sample period is divided into two sub-periods, namely Q1 to Q2 and Q3 to Q4.
This is done in light of earlier analysis that showed occurrence of a structural break in the series in Q3. The long-run estimates are contained in Table 8. As was the case previously, petrol price declines do not feed through to inflation over the long-run in both periods. On the other hand, petrol price increases feed through to inflation over both the periods. The coefficient on petrol price increases petrol-positive declined from around 0.
The decline in the pass-through coefficient is very much in line with the international experience as pointed out in Section 2. This in effect implies that a 10 percent increase in petrol prices currently results in headline inflation increase by about 1. These estimates can be used to ascertain the total contribution of petrol inflation to headline inflation during the sample period.
The results are captured in Table 9 and indicate that the total contribution of petrol prices to headline inflation declined from about 2. The direct contribution of petrol price increases to inflation remained approximately at 0. It is, however, important to note that, despite the decline in the total contribution in terms of percentage points, the significant decrease in headline inflation over the sample period effectively resulted in the contribution of petrol price movements to headline inflation increasing from about 19 percent Jan76 to Jun95 to approximately 24 percent Jul95 to Dec Some policy implications and areas for further research The empirical analysis in this paper has shown that the significance of petrol price movements for inflation outcomes in South Africa has increased over time.
Petrol price movements accounted for approximately 24 percent of headline inflation during the period July to December The direct contribution of petrol inflation to headline inflation has exceeded its weight in the CPI. In addition, the analysis has shown that petrol prices have an important bearing on other non-petrol prices in the economy - stated differently petrol prices have strong second round price effects and are thus an important component of inflationary pressures in the economy.
The CPI less food and energy petrol prices is conventionally regarded as an appropriate measure of core inflation or inflationary pressures in the economy. The exclusion of petrol prices is justified on the grounds that it is very volatile and is mean reverting over the long-run. However, excluding petrol prices from the core inflation measure is only justified if its long-run mean is equal to the core inflation measure.
The argument here is that if the means are equal over the long-run then this implies that short-run fluctuations in the petrol price do not have a lasting impact on inflationary pressures.
Table 10 captures the results for the equality of means test between petrol and non-petrol inflation. The results indicate that the hypothesis of equality of means between petrol inflation and non-petrol inflation is rejected. This implies that petrol prices play a role in underpinning inflationary pressures in the South African economy. However, the official core inflation measure in South Africa excludes petrol prices - thus, the link between petrol inflation and inflationary pressures is much stronger than is assumed in policy circles in South Africa see various monetary policy statements of the South African Reserve Bank.
The role and significance of petrol price movements on core inflation measures in South Africa is an issue that warrants investigation. More specifically, further research that more systematically examines the influence of petrol price movements on inflation expectations and inflation dynamics could be very beneficial to policy formulation in South Africa. As mentioned earlier, international factors account for approximately 60 percent of South Africa's fuel price.
South Africa is a small open economy and hence is a price taker on the international market. However, the volatility and depreciation in the currency has had a significant on South Africa's fuel price trend. In a case where exchange rates are very volatile - fuel price-smoothing mechanisms could be used to cushion the adverse exchange rate impacts.
Coady et al. The recommendations and options outlined by Coady et al. An important area that has not been explored in this paper, but is worthy of further research, is the welfare implications of fuel price increases. Since the poor spend a larger portion of their income on transport costs, an issue of policy relevance is how fuel price increases impact on the economic welfare of the poor. The international experience related to transport subsidy reforms suggest that these should form part of a comprehensive strategy aimed at improving the overall efficiency of the transport sector Anand et al.
This issue is of particular relevance given reports that the government plans to overhaul the structure and manner in which public transport is subsidised in South Africa Business Day, Conclusion The analyses of the impact of fuel price increases on inflation outcomes in South Africa since the mids was carried out.
The results show that petrol price movements had a significant bearing on inflation outcomes. The direct contribution of petrol inflation to headline inflation did not only increased but also exceeded its weight in the CPI over the last three and a half decades.
In addition, the analysis showed that petrol prices have an important bearing on the prices of other non-petrol commodities in the economy. In short, petrol price increases had an important bearing on inflation outcomes in South Africa. Petrol price movements, therefore, warrant a special attention in policy formulation and implementation in South Africa if inflation outcomes were to be kept in check.
References Alvarez, L. The impact of oil price changes on Spanish and Euro area consumer price inflation. Economic modelling Do we really know that oil caused the great stagflation: A monetary alternative with comments.
NBER Working paper National Bureau of Economic Research. Systematic monetary policy and the effects of oil price shocks. Brookings papers on economic activity, economic studies program. The Brookings Institution The Macroeconomic effects of oil price shocks: Why are the s different from the s? In Gali, J and Gertler, M.
University of Chicago Press, Chicago: Economics of worldwide stagflation. Cambridge, Harvard University Press. Measuring core inflation. In Mankiw, G.
The University of Chicago Press. Testing for the effects of oil-price rise using vector autoregressions. International Economic Review ANC looks at 'subsidies for commuters. Commodity prices and inflation dynamics.
BIS Working paper. Bank for International Settlement. Oil price pass-through into inflation. Energy Economics Time variation in the inflation pass-through of energy prices. Journal of Money, Credit and Banking Automatic fuel pricing mechanisms with price smoothing: Design, implementation, and fiscal implications. Technical notes and manual. Competition Tribunal. South Africa. Accessed on 12 March Another pass-through bites the dust? Oil prices and inflation. On the relationship between electricity and income for industrialised countries.
Journal of Electricity and Employment Crude oil and the macroeconomy: Tests of some popular notions: Note. Inflation pressures and monetary policy options in emerging and developing countries: A cross regional perspective. International Monetary Fund, Washington. Oil and the macroeconomy since world War II. Journal of Political Economy. A neoclassical model of unemployment and the business cycle. Journal of Political Economy Are oil shocks inflationary?
And the exchange rate continued to decline makes the process difficult business of Costco. The inflation rate The inflation rate in reached its highest level in half a century, industrial production in went down for the first time since The main reason is the U.
B 2nd M. COM V. C ABSTRACT: India is one of the trillion dollar economy in the world and known for its unique qualities which is turning itself into a hot destination for foreign investors and there are also certain problems which is retarding its economic growth as of today among many major economic problems INFLATION is also one and in past recent months it went to double digit also. It plays a vital role in Indonesia growth rate.
It is a developing country so they have good inflow of FDI. Inflation rates: Inflation rate is still high but it has come down after a high of It was 9.
The major reason behind it is economic downturn. And this is generally considered as the result of the amount of money in circulation more than the actual needs of the economy. It will directly leads to the devaluation of paper money. The entire economy is affected by rise of the cost of living. It also affects the cost of operating a business, borrowing money, mortgages, corporate and government bond yields, and every other aspect of the economy.
There are several advantages of inflation in the economy. Some include moderate rates of inflation which allows prices to adjust. When inflation occurs, each dollar of income will buy fewer goods and services than before and reduces the purchasing power of money. When inflation occurs, every dollar of income buys fewer goods and services than before and reduces the purchasing power of money.
I was in regular contact with nominated guide and contacting him for discussing the project. Rampant inflation is very damaging to an economy and can have long lasting effects on the country and the World financial markets. Because of globalization the world is more interconnected than ever and in turn no economy is fully insulated from disruptions to the global markets.
The difference between inflation and hyperinflation is also discussed. Inflation is the increase in the cost of goods and services while the amount of goods and services purchased decreases. When the price of goods and services increase and wages and salaries do not increase at the same rate, an individual has less available cash to spend. The result is a reduced value of the dollar. It is measured as an annual percentage increase.
When there is an inflation, the same amount of money buys a smaller percentage of a good or service compared to previous years. This means the value of money drops when inflation occurs. In economics, the value of money is viewed in terms of purchasing power, which is the real, tangible goods that can be bought by money. Demand - pull inflation 2. Cost - push inflation 3. Monetarist Theory 1. Quite simply 'too much demand is chasing too few goods'.
Keeping costs down has assisted the US economy in balancing the control of inflation better than other countries emerging from the global recession, such as China and Europe.
But with the US economy still recovering and inflation rates in other nations rising the concern of slipping back into another recession has become a very real issue. Factors such as supply and demand, price elasticity and inflation are all contributing factors to the outcome. In this document, I want to show how consumer spending can cause inflation and explain how inflation is monitored and measured.
While deflation is when the inflation rate goes below zero, making it a negative inflation rate. This paper also suggests what care needs to be taken by the Retailers for tackling inflation. The economic recovery, essential to the wellbeing of the British economy, may be in jeopardy as inflation continues to rise, reducing the purchasing power of the public.
In the past decades, China has experienced a rapid economic growth. However, Chinese people have been greatly affected by the inflation caused by such rapid economic development. Compared with other years in s, the inflation rate in , , and were quite higher which more than 3 percent Zhang, However, when inflation increases, thinking in these nominal terms can be very harmful, particularly to long-term investment planning.
As a result of current events, it might be practical to take into account the next phase the economy will be in. You can use trial and error or the annuity calculator to solve for N. Note: results may differ slightly due to rounding. Problem 26 In , interest rates were 7.
What was the real interest rate in ? How would the purchasing power of your savings have changed over the year? The purchasing power of your savings declined by 3. When inflation occurs, every dollar of income will buy fewer goods and services than before and reduces the purchasing power of money.The results show that petrol price movements had a significant bearing on inflation outcomes. Thakoor, V. Inflation, as one of the main macroeconomic issues, is a really urgent problem of today.
The marginal propensity to consume is the: B. How would the purchasing power of your savings have changed over the year?
On the other hand, price declines Petrolnegative do not feed through in the long run indicating that prices are sticky downwards. Testing for the effects of oil-price rise using vector autoregressions. There exists a consistent conventional Phillips curve despite some changes in monetary policy.
More recently, however, the depreciation of the currency put significant upward pressure on domestic petrol prices. Inflation can be described as a steady increase of the total prices of goods and services in the economy. International Economic Review
The difference between inflation and hyperinflation is also discussed. It will directly leads to the devaluation of paper money. Less government spending would mean more private spending. The main motivation for the change, however, was to provide a more accurate estimate of the international price of petroleum products.
B 2nd M. The bivariate VAR model is given by Equations 1 and 2. The Brookings Institution Inflation has many definitions, but most of these definitions are related to one concept which is inflation is a general increase in prices and fall in the purchasing value of money. Examining data for both advanced and developing countries, Cecchetti and Moessner found that, in the period preceding the commodity price hike of , core inflation did not revert to headline inflation.
The penultimate section highlights some policy implications and areas for further research and section 7 concludes. By the end of , international factors accounted for approximately 60 percent of the petrol price. Inflation is an increase in all of the prices of goods and services in the economy, while deflation is the decrease of all prices.
The next section highlights how fuel prices have evolved in South Africa over the last three and a half decades.
In addition, the granger causality tests show that petrol price increases also have indirect effects on headline inflation by virtue of its impact on other non-petrol prices. Table 10 captures the results for the equality of means test between petrol and non-petrol inflation. Inflation is an increase in all of the prices of goods and services in the economy, while deflation is the decrease of all prices. If this is not done then this is not the effect of stopping. The researches of the inflation, which are studied, by a lot of scholars in the field of economics have been conducted for a long time especially during the s and it is the heyday when people would like to pay more attention to research the inflation. Section 2 provides a brief overview of the empirical literature on the macroeconomic impacts of fuel price changes.
Inflation can be described as a steady increase of the total prices of goods and services in the economy. This is referred to as second round price effects in the economic literature and occurs when petrol price increases result in rises in input or production costs which result in a more generalised price increase in the economy. Coady et al. Prices and wages could be adjusted fast.
But with the US economy still recovering and inflation rates in other nations rising the concern of slipping back into another recession has become a very real issue. In economics, the value of money is viewed in terms of purchasing power, which is the real, tangible goods that can be bought by money. Journal of Applied Econometrics It plays a vital role in Indonesia growth rate. As was the case previously, petrol price declines do not feed through to inflation over the long-run in both periods. A bivariate vector autoregressive VAR model comprising petrol inflation Pet and non-petrol NonPet inflation and the Toda and Yamamoto Granger Causality test is used to ascertain the causal link between the variables.