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Rand Volatility and Inflation in South Africa: The Real Cost to Ordinary Citizens

How does the impact of South African rand fluctuations and surging inflation trickle down in real life? Here’s the scoop for consumers and workers, as well as small businesses.

Chances are most South Africans have felt it anywhere from the grocery store, petrol station to online – prices are going up, things are getting costlier, and the rand buys less than it did a year ago. These simple day-to-day experiences show two powerhouse forces within the economy: currency volatility and inflation.

Although these may appear as remote financial terms, the fact is that they are very direct and personal to the average person. From what bread costs to what fuel and imported goods or local services charge, every fluctuation in the rand’s value has an impact on just how far a paycheck goes.

We analyze in this paper what drives rand volatility and inflation, how they feed into each other and what it translates to in real life for the people, workers and companies in South Africa.

The Rand (ZAR) is the South African national currency. It stands among the most traded national currencies for those from the developing markets, third only behind Mexican and Brazilian money. This is a very sharp exposure to the mood of investors worldwide, world politics, and prices of commodities.

By “volatility” we mean that the Rand tends to change quickly or unpredictably relative to major world currencies like the US dollar or euro.

For the year 2023 only, Rand has been wandering against the US dollar between R17.20 and R19.80 because of; Global interest rate changes (specifically US) Power outages and energy uncertainty Geopolitical tensions and diplomatic statements Market reaction to political announcements or credit rating changes These violent swings of the exchange rate add insecurity to – anyone involved in imports, foreign loans or international investments – and also to the price of essential goods and services.

What is inflation?

Inflation is the increase in the level of prices of goods and services over time. It erodes the value or the purchasing power of money since one and the same amount of rand will buy less.

Over the last years, South Africa’s annual inflation rate has been moving between 5% and 7% this places it above the Reserve Bank’s preferred target mid-point set at 4.5%. Notably, some of the largest increases have been in food, fuel and electricity costs.

Main ones:

Rand volatility worsens inflation in the following ways:

1. Fuel prices- The influence of global oil prices coupled with a weak rand translates to more expensive fuel.

2. Imported goods- Electronics, clothes, and machinery grow dearer as the rand sinks.

3. Electricity & utilities – Eskom and municipal tariff adjustments also bite into family budgets.

How does rand volatility worsen inflation?

Here’s how these two factors are linked:

Increased prices of imported goods and input as the rand weakens South Africa is heavily reliant on imports of oil, food ingredient, medical equipment and manufactured goods. The extra costs are passed on by businesses to consumers, hence leading to inflation. On the other hand, a stronger Rand would help relieve inflationary pressure because it lowers the cost of imports. Nevertheless, this benefit generally proves short-lived, especially when local production costs also go up. Thus, although currency fluctuations are intrinsic in a market economy, high volatility leads to instability, making it difficult for households and businesses to budget.

Economic terms are technical, but their effects are deeply human. Let’s look at some of the ways inflation and rand instability are affecting everyday life:

1. Rising food prices and most people

South Africa’s food inflation has regularly been above 8%, between the years 2021 to 2024 with maize, meat, cooking oil, and bread all registering sharp increases. For low- and middle-income households especially where food takes up a big portion of their monthly spending, this translates into hard choices: less variety, smaller portions or skipping meals altogether. 2. Increased transportation and fuel costs

Weak currencies and sharp increases in international oil prices contributed to gasoline prices increasing by over R2 per liter year on year at mid-2024. It’s not just private car owners who are affected – this has a direct impact on taxi fares, delivery charges, even bus tickets and affects the cost of living for millions.

3. Pressured School and Household Budgets

School uniforms, stationery, household appliances, and basic toiletries are all which many, as it is known to all, usually imported or linked with the world supply chains. Most of them have appeared to grow costly. Families are having to find more ways of stretching their budgets to be able to avail of the same goods that were once bought hassle-free.

The SMEs generally operate on limited margins since once the rand has depreciated, they will then have to pay more for imported products or raw materials. Do they pass the increase on and lose customers, or do they absorb the increase and watch their profits deteriorate? It is a tough position either way.

The South African Reserve Bank (SARB) plays the main role of the guardian of inflation. It does it through influencing the repo rate – the rate at which commercial banks borrow money. Increasing this rates up, therefore, makes borrowing quite expensive, hence helps to reduce inflation.

However, higher interest rates increase the cost of borrowing in general, affecting home loans, mortgages, and credit card facilities most directly related to household budgets. In the meantime, the government still prioritizes:

What households and businesses can do?

House recycling of products will reduce the consumption of raw materials in factories. The households demand and consume the products and therefore must:

• Monitor monthly expenditures, making corrections due to the price variations.

• Make more of essential purchases rather than using buying on credit.

• Shop around, compare the prices of goods, and be prepared to switch brands where necessary.

For businesses: Diversify suppliers to reduce reliance on volatile imports. Hedge currency risk where applicable. Gradually pass on price increases while maintaining customer transparency and loyalty.

Volatility and inflation in the rand are not mere economic indicators but present real challenges to financial stability for South African families and businesses.

In addition to the above, with proper governance, explicit policies, and intelligent monetary tools, much of a country’s economic d­ynamics c­an be managed.­ M­eanwhile, informed and flexible ­individuals and bu­sinesses will tend to make their way through uncertainty with more confidence. It’s still a­ll about possibilities, but only if today gains the right steps toward building a more stable foundation for a­ll in the f­uture.

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