All you need to know about inflation

Idowu, a housekeeper now eats twice a day with her four children owing to escalating food prices.

She can no longer afford to pay the school fees of her children as accelerating inflation has continued to reduce her income, thus her purchasing power.

Data from the National Bureau of Statistics (NBS) shows that the inflation rate in Africa’s biggest economy slowed to 15.99percent in October from 16.63percent in September.

According to experts, the slowing inflation rate does not truly reflect market realities, as prices keep surging.

However, before we dive into the numbers, let’s go back to the basics of inflation, and how Nigeria calculates its inflation rate.

What is Inflation?

Inflation refers to the continuous rise in the general prices of goods and services such as food, clothing, housing, transport, and consumer staples among others.

Inflation is often expressed as a percentage that measures the average price change in a basket of goods and services over a period of time. A basket of goods and services represents the value of a specific group of products and services

When the general price level increases, each unit of currency can buy fewer goods and services. As a result, inflation decreases the purchasing value of money. That is, what the money can buy now is lesser than what it could buy before.

When expenses rise faster than income due to inflation, the standard of living declines because it becomes harder to afford as much as you formerly could, even necessities.

For example, N12,000 could buy you a 12.5kg gas, a crate of egg, a pack of milo, milk, sugar, a paint bucket of garri, a pack of spaghetti and a carton of noodles in the last two months. Then you go to the market today, and N15,000 would be needed to buy the same items. That is the effect of inflation.

Like what is currently happening in Nigeria, where what N10,000 can buy now is less than what it could buy last month.

What are the types of inflation?

To understand inflation better, we need to look at the types of inflation.

Creeping Inflation occurs when the price increase happens at a very slow pace. When a price increase is constant yearly at less than three percent, then it is creeping inflation. This percentage is safe and essential for economic growth.

Walking inflation occurs when prices rise reasonably and annual inflation rate is a single digit. This occurs when the rate of rising prices is in-between the range of 3 to less than 10 percent.

This rate is a warning signal for the government to control it before it turns into running inflation.

Running Inflation is when prices rise speedily at the rate of 10 to 20 percent per annum. This type of inflation has incredible adverse effects on the poor and middle class.

For instance, Nigeria has been reporting a two-digit inflation rate since 2015. This is the range at which Nigeria falls presently.

Stagflation is a situation in which there is a persistent price increase, stagnant economic growth, and the rate at which people are jobless remains steadily high.

For example, what happened in the first quarter this year where inflation grew for 16 straight months to hit 18.17 percent in March quickened by rising food prices, employment at 33.33 percent, and growth rate at 2.7 percent.

Read also: CBN holds interest rate for 8th straight time on slowing inflation

Lastly, hyperinflation is a situation where prices rise very fast at double or triple-digit rates. This could get to a situation where the inflation rate can no longer be measurable and uncontrollable. Prices could rise many times every day. At this point, money is worth so little that it is worthless.

What are the causes of Inflation?

There are majorly two causes of inflation; Demand-pull inflation and Cost-push inflation.

Demand-pull Inflation is where an increase in prices of goods and services is caused by an increase in demand for goods and services, compared to the less supply of those goods and services.

Cost-push Inflation is a rise in price due to an increase in the cost incurred during production. The cost of production may rise due to a rise in the cost of raw materials or an increase in wages.

How does Nigeria measure its inflation rate?

Inflation is usually stated as a month-on-month or year-on-year percentage change based on price levels that are summed in an index.

In Nigeria, inflation is usually calculated as the percentage change in the Consumer Price Index (CPI) of a period from year to year.

According to NBS, the CPI measures the average change over time in the prices of 740 goods and services consumed by people for day-to-day living in the 36 states.

The statistical body collects prices of a basket of goods and services commonly purchased in each sector (urban and rural) over that period and compares it to the base year’s price to obtain the CPI.

After, a percentage change of the CPI is measured using the Laspeyres formula. This is calculated by working out the relative price in the current year with that of the base year, multiplied by 100.

Why is Nigeria’s inflation slowing despite prices are surging?

Looking at the numbers, in the recent inflation report published by NBS, the country’s consumer price index (which measures the changes in the price of some goods and services paid by Customers, you and I) increased by 15.99percent year-on-year to 399.87 index points in October 2021 from 14.23percent year-on-year to 344.73points in the corresponding period of 2020. While in the previous month, September, the CPI rose by 16.63percent year-on-year to 395.98index points.

Looking at this, it is the rate at which the prices of things increased in October compared to the corresponding period last year that is lower than that of September. That is, it is the year-on-year percentage change in October compared to September 2021 that has dropped not the consumer price index. So, the purchasing power of a Nigerian has weakened.

Therefore, the inflation rate has slowed down by 0.64 percent in October compared to September. Meanwhile, it increased by 15.99 percent compared to the corresponding period last year. Nigeria’s inflation has not reduced in an actual sense, her inflation is still very high (two-digit).

“Prices are still going up but at a slower pace, the only time you see inflation numbers translating to what you have in the market in terms of decline is when you have continuous moderation in prices over an extended period, you will begin to see the impact and this isn’t immediate it takes a while.” Olaolu Boboye, Economist and Fixed income Analyst at Cardinal stones said.

Using cooking gas as an example, a 12.5kg gas used to be N4,000 but now N7,500, if we begin to see an adequate supply of gas or if the cost of bringing in gas is relatively cheaper, this would limit sellers from increasing prices of gas unnecessarily.

If this continues over time, the price would start declining. Initially, the price would begin to moderate, which means the rate of price increase would slow down (moderate), then the price would decline.

However, inflation captures the entire basket of certain goods and services, so some prices of goods might be going up while others are going down.

How does inflation affect us?

During inflation, most prices rise, but the rate of increase of individual prices of each good and service differ. Prices of some goods and services rise faster than others while some may even remain unchanged. Inflation affects us differently, depending on the group we fall under. High inflation tends to affect a group positively and some others negatively.

For instance, the poor and the middle classes suffer because their wages and salaries are more or less fixed but the prices of commodities continue to rise. This means their unchanging salary or wages would be spent on the higher cost of goods and services.

Inflation can lower the value of your savings over time if prices continue to rise. When you keep your money in a bank, you may receive interest, which helps to reduce the impacts of inflation. Banks often pay higher interest rates when inflation is strong but that is not the case in Nigeria currently.

The monetary policy rate (MPR) of Nigeria is now at 11.5 percent. This means banks must give their customers an average interest rate of 1.15 percent for saving with them. But inflation is currently at 15.99 percent. You will essentially lose money if your savings do not increase at the same rate as inflation.

On the other hand, the businessmen, industrialists, traders, real estate holders, speculators and others with flexible incomes gain during rising prices. This is because their earnings can be adjusted to the rising prices.

Also, your investments may become worthless as inflation grows, especially if the return rate is low.

The majority of investors want to boost their long-term buying power. Inflation hinders this since investment returns must first match inflation to enhance real buying power.

For example, a 13 percent investment return before inflation may appear attractive, but in a 19 percent inflation environment, the actual returns will be negative, yielding a -6 percent return when adjusted for inflation. This is a loss-making investment.

When there is inflation, a creditor who borrows someone’s money and is expected to be paid back at a later time is at a disadvantage because the value of the money when returned would have reduced to the extent of the rate of inflation. On the other hand, a debtor (the person who borrowed money) tends to pay less in real terms than they had borrowed. Therefore, it could be said that inflation favours debtors at the disadvantage of creditors.

Inflation can also reduce purchasing power over time for recipients of fixed income. For example, recipients of interest and rent, transfer payments such as pensions, unemployment insurance, social security, etc. These people lose because they receive fixed payments while the value of money continues to fall with rising prices.

Lastly, the government will have both positive and negative effects on inflation. The government as a debtor gains at the expense of households who are its principal creditors. This is because interest rates on government bonds are fixed and are not raised to offset the expected rise in prices. The government in turn charges less tax to service and retire its debt. With inflation, even the real value of taxes is reduced.

Inflation helps the government in financing its activities through inflationary finance. As the money income of people increases, the government collects that in the form of taxes on incomes and commodities. So the revenue of the government increases during rising prices.