Second Round Effects from Food and Energy Prices an SBVAR approach

Franz Ruch and Stan Du Plessis ()

No 7008, Working Papers from South African Reserve Bank

Abstract: Relative food and energy price shocks are important in South Africa and have contributed an average of 2.4 percentage points (or 39 per cent) to an average 6.1 per cent headline consumer price inflation from 2000 to 2014. In general, monetary policy can look-through these shocks as long as there are no second-round effects raising inflation expectations and salaries (expectations channel), and core inflation (cost channel through marginal cost) in the economy. To measure the importance of second-round effects this paper estimates a Structural Bayesian VAR with short- and long-run as well as sign restrictions in South Africa since 1994. The results show that there are second-round effects in SA with a one per cent shock to relative food, petrol and energy prices leading to a 0.3 per cent increase in both unit labour cost and core inflation about a year after the shock. Higher core inflation is due to both the cost and expectations channels with households and businesses bidding-up inflation expectations and wages (i.e. the expectations channel) and firms increasing prices.

Date: 2015-12-10
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