A Reinvestigation of the Oil Price and Consumer Price Nexus in South Africa: An Asymmetric Causality Approach

The relationship between oil and the price level has always garnered attention from policy makers and role players in the market. Periods of high oil price volatility is thought to have negative repercussions for domestic price levels in an oil importing country. Research in the past has shown that the relationship between oil prices and consumer prices requires a non-linear form to correctly capture causal effects. Thus we use a new asymmetric causality test developed by Hatemi-J (2012) to determine the relationship between oil prices and the price level in South Africa over the monthly period of 1921:M02 to 2013:M10. This method separates the effects of positive shocks from negatives ones and affords one the ability to test for an asymmetric relationship. We find evidence in favour of a causal relationship from oil prices to the price level, but this relationship is confined to the short run as there is no cointegrating relationship. The asymmetric tests show that both a positive and negative oil price shock leads to a positive price level shock, however the evidence in favour of a negative oil price shock is stronger.