Bad news for car and tech prices in South Africa

Last Updated: March 16, 2022By Tags: , ,

After two years of semiconductor chip shortages and supply-chain issues caused by the Covid-19 pandemic, tech and vehicle prices face another knock after Russia’s invasion of Ukraine, says senior economist at Absa CIB Peter Worthington.

With Ukraine and Russia together accounting for 70% of the world’s exports of neon gas, the conflict may impair the supply of critical semiconductor chips, which was only just beginning to settle after the disruptions of the pandemic, he said in a research note on Tuesday (15 March).

Highly purified neon gas is a key component of the lasers that etch the integrated circuits onto the silicon wafers, said Worthington.

“But since neon gas is distilled from the air, other suppliers can perhaps fairly quickly set up production capabilities, unlike other key commodities, such as oil, palladium or cobalt, where the available supply is tied to a particular national geography.”

“Thus, goods such as new vehicles (5.4% of the CPI basket) and other chip-reliant goods such as televisions, household appliances and telephones (collectively 1.2% of the basket) may experience some supply challenges that could shore up their prices.”

Worthington added that new vehicle inflation has been gently rising recently after several years of prints below the average CPI inflation.

“Some players in South Africa’s motor vehicle distribution industry believe that prices will decline, rather than rise. Generally, the fact that this shock will be a significant hit to consumers’ real disposable income is a countervailing demand-side offset to the various supply-side cost-push pressures.

“The exact price intersection where volatile and uncertain demand and supply curves meet is difficult to pin down with confidence, especially against the current backdrop of this big stagflationary shock. That said, we are lifting our core CPI inflation forecast by 0.3 percentage points in 2022 and by 0.4 in 2023.”

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