The Impact of External Shocks on South African Inflation at Different Price Stages

Over the past few years the South African economy experienced strong exchange rate movements as well as shocks to oil prices and import prices. Thorough knowledge of the pass-through of these external factors to domestic inflation is of particular importance for monetary policy. This paper makes use of a VAR of a distribution chain to provide empirical evidence on the pass-through of three external shocks (oil price shocks, exchange rate shocks and non-oil import price shocks) on inflation in South Africa at different price stages. Including prices along a distribution chain is of great interest for price analysis as it reveals how external shocks are propagated from one price stage to the next. The study highlights the relative importance of different external shocks, as well as their combined importance in explaining domestic inflation in South Africa.