Analysing the rising oil price shock driven by Russia-Ukrainian tensions - effect on inflationary pressure in South Africa

Abstract

Objective – The aim of this paper is to examine the relationship between the CPI, the brent crude oil price, and the PPI for final manufactured goods as well as the Rand/Dollar exchange rate during the past year. The study used South Africa as a proxy for developed countries. The objective is, therefore, to evaluate the effects of the increase in commodity prices on inflation and other macroeconomic variables. Methodology –The study utilised a quantitative methodological approach through the assessment of an econometric model that employed monthly data from January 2017 to May 2022. The paper utilized variables such as CPI, brent crude oil prices, PPI for final manufactured goods as well as the Rand/Dollar exchange rate. Findings – Short- and long-run relationships were established between the variables using the vector error correction model (VECM) and the Johansen co-integration equation methods. The long-run conclusions showed that high brent crude oil prices, high sunflower oil, a depreciating exchange rate and increasingly high PPI levels will lead to an increase in the CPI (Inflation). The results also indicated that oil prices still influence the basic prices of goods and services since all things need to be transported. Novelty – The results of the study showed that a perpetual international and national macro-economic environment is crucial to prevent inflationary pressures and price shocks, while volatile exchange rates unsteady PPI’s and significantly high oil and commodity prices causes cost-push inflation. Policy certainty and political stability is important to keep inflation stable and economic growth positive, which could lead to a more self-sufficient economy which are is reliant on political instability as an obstacle for positive future economic growth. Type of Paper: Empirical JEL Classification: E31, E37, E60, E63 Keywords: Russian-Ukrainian conflict, economic growth, Brent crude oil prices, PPI, CPI, exchange rates, sunflower oil. Reference to this paper should be made as follows: Neethling, J.R; Wyk, A.S.V. (2022). Analysing the rising oil price shock driven by Russia-Ukrainian tensions - effect on inflationary pressure in South Africa, J. Bus. Econ. Review, 7(3), 178–193. https://doi.org/10.35609/jber.2022.7.3(3)