An empirical analysis of the relationship between food inflation and passenger vehicle purchases in South Africa

Abstract

Food inflation in South Africa has been viewed as an important source of underlying inflationary pressures in the economy due to its persistence beyond that of other commodities. Although several studies found food to be one of the factors that influence purchase decisions, there still appears to be an absence of research that directly links food inflation to consumers’ decisions, especially when financing the purchase of new passenger vehicles in South Africa. In this regard, this study investigated whether the increase in the prices of food products has a significant effect on passenger vehicle purchases in South Africa. Leaning on the literature that argues that economic factors do not play much of a role in passenger vehicle purchase decisions in South Africa, it was hypothesised that there is no supported relationship between food inflation and passenger vehicle purchases in South Africa. Using secondary time series data, the Pearson correlation test revealed a negative but insignificant relationship between food inflation and vehicle purchases in South Africa. The ordinary least squares estimate of the purchase function, taking into account several economic factors that influence passenger vehicle purchase decisions in the literature, showed that disposable income of households along with vehicle purchases of the previous period are to be considered as main determinants of vehicle purchases in South Africa. In addition, it was also revealed that new vehicle prices are also a significant determinant of vehicle purchases. The Johansen cointegration test revealed that the variables in the vehicle purchase function were cointegrated in the long run. The vector error correction model showed a long-run relationship, albeit insignificant, between food inflation and vehicle purchases and no relationship between the two variables in the short run. The Granger causality test revealed that food inflation and vehicle purchases are independent from each other, meaning that no causal effect was found between the variables, regardless of the direction of the test. This study concluded that economic factors such as interest rate and fuel price have an insignificant influence on passenger vehicle purchases in South Africa. In the same line, the impact of food inflation on passenger vehicle purchases in South Africa was found to be insignificant, therefore, the conclusion was drawn that the increase in the prices of food products will not play a considerable role in consumers’ decisions regarding passenger vehicle purchase in South Africa.