How to invest when inflation bites

When high inflation occurs alongside high unemployment and low economic growth, the CBN finds itself in a dilemma.

Alice Abegunde, a mother of three teenagers, does not understand the reason behind the constant increase in the price of rice, her children’s favourite food.

“Every time I go to the market, they have added to the price of rice,” Abegunde, 44, a resident of Lagos State, says.

While Abegunde might not be able to connect the dot and blame the rice sellers for the rise in price, Emeka Johnson could, he knew times were going to be hard as inflation numbers kept rising and resolved to save more and spend less.

What Johnson does not know is that he is constantly losing money because the value of his money drops as inflation rises.

What is inflation?

Inflation is the general rise in the prices of goods and services over time. The “inflation rate” is the rate at which the change in prices happens; this is usually expressed in percentages over time. For instance, if inflation goes up 10 percent than last year, it means purchases will cost 10 percent more than they did last year.

Basically, inflation reduces the value or usefulness of money; the higher inflation rises, the less your money is worth, in real terms as time goes by. Therefore, inflation is about your purchasing power, that is, how much your money can buy.

What causes inflation?

There are reasons why prices rise. First, when everyone suddenly develops a taste for beef, the price of beef will rise. This follows a basic law in economics that, higher demand for a product will push up its price. This is also called demand-pull inflation.

What this means is that when the demand for goods and services in the economy exceeds the economy’s ability to produce them, their short supply places upward pressure on prices and gives rise to inflation.

Another reason prices rise is that the cost of producing goods and services increases. Companies would usually respond to higher cost of production by increasing the price they sell their products; they do this to cover the extra cost they incurred while producing. This is known as cost-push inflation.

How is inflation measured in Nigeria?

Every month we hear news about new inflation rate or data but have you ever wondered how it is calculated? Nigeria uses a well-known indicator called the Consumer Price Index (CPI), which measures the average change over time in prices of goods and services consumed by people every day.

In Nigeria, the CPI is calculated by the National Bureau of Statistics (NBS) and published every month. To calculate CPI, the NBS gets people to collect prices for thousands of items that an average Nigerian consumer buys such as food, prescription drugs, rent, petrol and many others. These items are grouped into categories called baskets. Every month, the NBS calculates the price changes of each item from the previous month and aggregates them to work out the inflation rate for the CPI basket.

Who controls inflation?

The Central Bank of Nigeria (CBN) is in charge of controlling inflation in Nigeria, not the government. The CBN has an objective of price stability, which means keeping inflation at a rate that keeps prices stable. An acceptable rate of inflation is single-digit inflation, anything above that will increase hardship in the country. At the moment, Nigeria’s February inflation rate is at the highest in four years, at 17.33 percent.

What inflation does to your money

There are reasons to worry about inflation and this concerns how rising prices affect money or our standard of living.

First, if expenses rise more rapidly than income as a result of inflation, it deteriorates the standard of living as that means it becomes difficult to afford as much as you used to, including the necessities.

When inflation rises, your savings might be worthless with each passing year, especially when the interest rate is lower. In Nigeria, the monetary policy rate (MPR) is currently at 11.5 percent. What this means is that the banks are to pay an average interest rate of 1.15 percent to their customers for saving with them.

If a depositor puts N100,000 in a savings account that pays 1.15 interest rate, after a year, you will have N101,150 in your account. But adjusted to inflation (17.3%), the N100,000 is only worth 82,700 in real terms.

If inflation really gets out of control, it becomes what is called hyperinflation, when money is worth so little that it is more or less worthless.

Why Nigeria’s inflation keeps rising?

Nigeria has had the problem of inflation before the pandemic arrived. In August 2019, the Federal Government made a decision to shut the land borders to trade with neighbouring countries as a way to boost local production.

However, this policy yielded little gains because the country could not produce enough to meet the demand of its huge population. Therefore, the gap the local production could not cover was passed on to the consumers in the form of high prices.

In July 2019, before this border closure policy was initiated, Nigeria’s inflation rate stood at 11.08 percent but since that time, inflation has been rising to reach the recent 17.33 percent.

The failed border closure pushed the cost of food upwards and this drove inflation during the period.

Even though Nigeria opened up its borders in December 2020, but prices are still rising as there are issues like insecurity in the North, where the majority of food items are grown.

There have also been a number of violent farm attacks, and clashes between herders and farmers in the North. This makes farmers apprehensive to go to their farmlands, and this would continue to weigh on food supply.

Why has the CBN not managed inflation yet?

If the CBN is responsible for keeping prices stable, you may wonder why they have not done anything about it.

When high inflation occurs alongside high unemployment and low economic growth, the CBN finds itself in a dilemma.