High rates versus luxurious products

June 27, 2023

Changes to the repo rate are effected to control inflation for the benefit of the country’s economy. However, one wonders whether these changes impact all goods or only the basic goods.

One wonders whether the changes to the lending rate ever really affect the high-end products.

There are various factors to consider in order to understand the impact of repo rate on luxurious products. We consider the principle behind the changes to the rate to ensure that we visualise the expected impact on the high-end products.

By increasing the rate, the aim is to slow down economic activities and reduce inflation. Disposable income is expected to decrease as more money is required to buy less products, and this ultimately leaves less money available to spend on luxurious goods.

Therefore, when rates are high, basic goods are expected to take priority in the spending chain and more luxurious goods are expected to take the back seat. The luxurious industry is expected to suffer during this period and should then reduce prices to cater for the changed economic environment.

While the reduction in available funds increases the prices of food, beverages, water, electricity, gas and fuels during this period, the prices of property and vehicles, clothing, jewellery and fragrances remain surprisingly stable. Property and vehicle prices are noted to have remained resilient during the rate hikes and the slowing economic activity, this is mainly attributable to the continued issuing of financing by financial institutions despite high rates.

The outlook for these industries follows this resilience and the effects of the rate changes are yet to be noted directly.

The clothing industry takes a hit due to the increased business costs co-existing with maintained selling prices, this is done in order to avoid customer resistance to increased prices. Instead of increasing clothing prices, retailers are expected to relook their costs and inventory levels to curb the increased costs, which reduces their profitability.

Similar to the clothing industry, the jewellery industry attempts to absorb the increase in costs rather than passing them on to their clients due to the sensitivity of customers to price changes. However, increased gold prices also increase the perceived value of gold jewellery, therefore the industry is not expected to crumble under the pressure of low economic activity.

Finally, the prices of fragrances, which have increased, but in no relation to the rate hikes. The changes in fragrance prices are attributable to their increased demand during the pandemic, which drove up the prices. It is noted that during the pandemic the repo rate was actually below normal levels, however, perfume prices increased as people were looking to treat themselves during the difficult times.

High-end products are not resistant to rate hikes, however they have proven to be resilient and tend to move in the opposite direction to the basic goods.

 *Justine Domingues an eligible CA(NAM) with a drive to make financial education widely available. She is the founder of Financial Zula, a Youtube channel that focuses on making financial education available. For more information, please check-out "Financial Zula" on Youtube.



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Last modified on Tuesday, 27 June 2023 21:26

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