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As of June 2024, Nigeria’s inflation rate stands at a staggering 33.95%, the highest in recent years and part of a consistent upward trend. Through this article, I hope to help you understand more about inflation, explaining what it is, how it works, and its impact on the average Nigerian. By the end of this piece, you will have a comprehensive understanding of inflation and be better equipped to make informed financial decisions.
What is Inflation?
Inflation is the rate at which the general level of prices for goods and services rises, affecting the purchasing power of citizens of a country. What this means is that, when there is a high rate of inflation, each unit of currency can only buy fewer goods and services. Typically, central banks and economists use various indices to track inflation, the most common being the Consumer Price Index (CPI). The CPI measures the average change over time in the prices paid by urban consumers for consumer goods and services.Types of Inflation
There are two primary types of inflation: demand-pull and cost-push. Demand-pull occurs when the demand for goods and services exceeds their supply. In contrast, cost-push arises when the costs of production increase, leading to higher prices for the final goods and services. Understanding these types helps to identify the root causes of inflation in any economy.- Demand-Pull Inflation: This occurs when the demand for goods and services exceeds supply. For example, during festive periods in Nigeria like Christmas and Eid, the demand for food items and transport services often spikes, leading to higher prices.
- Cost-Push Inflation: This happens when the costs of production increase, leading to higher prices for finished goods. An example is the rise in fuel prices, which increases transportation costs and subsequently, the prices of goods and services.
- Built-In Inflation: This type of inflation is driven by adaptive expectations. If workers expect inflation to rise, they demand higher wages. Businesses then pass on these higher labour costs to consumers in the form of increased prices, perpetuating a cycle of inflation.
Causes of Inflation in Nigeria
Inflation in Nigeria can be attributed to several factors, both domestic and international. One significant domestic factor is the fluctuation in the exchange rate. Nigeria heavily relies on imports for many goods, including essential items like food and fuel. When the Naira depreciates against other currencies, import costs rise, leading to higher prices domestically. Another factor is the government’s fiscal policies. For example, when the government increases spending without a corresponding increase in revenue, it can lead to higher inflation. This is often financed by borrowing, which can increase the money supply in the economy, further driving up prices. The current high rate of inflation in Nigeria is believed to have its roots in the May 29 2023 inauguration day speech of Bola Ahmed Tinubu, in which he announced, rather carelessly and without much thought, that “subsidy is gone!” Additionally, disruptions in the supply chain, such as those caused by the prevalence of Farmer-Herders clashes in most states of the country, have had lingering effects on the availability of foodstuffs and other goods, contributing to inflation. Infrastructural challenges like the poor state of the roads in Nigeria and of course high cost of transportation, also contribute to these supply issues, leading to higher costs.Current Inflation Trends in Nigeria
As of June 2024, Nigeria’s inflation rate is 33.95%, marking the 17th consecutive month of acceleration. This is the highest reading in recent history and highlights the severe economic challenges faced by the country. The inflation rate was 29.90% in January 2024 and climbed steadily, reaching 31.70% in February, 33.20% in March, 33.69% in April, and 33.95% in May. This increase is driven by the depreciation of the Naira, increased fuel prices, and supply chain disruptions, among other drivers. The National Bureau of Statistics (NBS) reports that food inflation remains particularly high, affecting staple items such as rice, beans, and bread, which are essential to the Nigerian diet, thereby putting immense pressure on household budgetsImpact of Inflation on Everyday Life
The impact of inflation is far-reaching, affecting every aspect of life, from the cost of living to savings and investments. For the average Nigerian, high inflation means that money doesn’t go as far as it used to. This can be particularly challenging for low-income households, who spend a larger proportion of their income on essentials like food and transportation. As prices rise, these households may struggle to afford necessities, leading to a decrease in their standard of living. For example, a bag of rice that cost between ₦25,000 and ₦50,000 in 2023 now goes for as high as ₦90,000 or more in June 2024. This increase forces families to adjust their budgets, often leading to sacrifices in other areas, such as education or healthcare.Sign up for the Connect Nigeria daily newsletter
When prices rise, the real value of money saved decreases, meaning that the purchasing power of saved funds diminishes over time. This can discourage saving and investment, as individuals may feel that it is better to spend their money now rather than watch its value decrease. Inflation also impacts investment returns. Fixed-income investments like bonds and savings accounts may offer returns lower than the inflation rate, leading to a loss in purchasing power. For businesses, inflation can lead to higher operating costs, as the prices of raw materials and labour increase. This can result in higher prices for consumers, reduced profit margins for companies, or both. In extreme cases, businesses may be forced to lay off workers or close altogether if they cannot pass on the increased costs to consumers. In recent months, many businesses in Nigeria, including multinational companies have either shut down operations or laid off some of their workers.
Coping with Inflation
Despite the challenges, there are several strategies individuals can employ to protect their finances. Here are some strategies to cope with rising prices:1. Diversify Your Income:
Having multiple sources of income can provide a buffer against the impact of rising prices, ensuring that you have more financial stability even in times of high inflation. This could involve taking on part-time work, freelance work, investing in dividend-paying stocks, starting a side business, or investing in income-generating assets.2. Invest Wisely:
Look for investment opportunities that have the potential to outpace inflation. Real estate, stocks, and commodities like gold can be good options. These investments can potentially provide returns that outpace inflation, preserving and even increasing the value of your money. For instance, investing in a piece of land in a developing area can yield significant returns over time. Also, inflation-indexed bonds can be a good investment option and are much safer. These bonds are designed to provide returns that keep pace with inflation, ensuring that your investment maintains its real value over time. Instruments like the Federal Government Savings Bond offer this kind of protection. You can contact a stockbroker or financial advisor for more on how you can invest right.3. Reduce Non-Essential Spending:
Maintaining a tight budget and cutting unnecessary expenses can help manage the impact of inflation. Review your spending habits. This might mean eating out less frequently, cutting down on some of the entertainment subscriptions you have or postponing the purchase of certain luxury items. By focusing on essential purchases and finding ways to reduce spending, you can stretch your money further.4. Leverage Technology:
Some so many financial apps and tools can help you keep track of your expenses, set budgets, and find the best deals. Apps like PiggyVest and Cowrywise can help you save and invest more effectively.The Role of Government
The Federal Government and the Central Bank of Nigeria (CBN) play crucial roles in managing inflation. One of the primary tools used by the CBN is the adjustment of interest rates. By raising interest rates, the CBN can reduce the money supply, thereby helping to control inflation. However, this can also make borrowing more expensive and potentially slow down economic growth. For instance, after the 295th meeting of the Monetary Policy Committee of the CBN held on the 20th and 21st of May 2024, the MPR was raised by 150 basis points from 24.75 percent to an all-time high of 26.25 percent. Fiscal policies, such as adjusting tax rates and government spending, are also used to manage inflation. For instance, reducing government expenditure can help curb inflation by decreasing the overall demand in the economy. Similarly, policies aimed at improving domestic production and reducing reliance on imports can help stabilize prices.Register to attend the CN Business Mixer
Concluding Thoughts
Inflation is an economic reality that affects everyone, but by understanding its causes and impacts, you stand a better chance to make informed decisions that will protect your finances. Whether it’s through wise investments, cutting unnecessary expenses, or leveraging technology, there are practical steps you can take to mitigate the effects of rising prices. Staying informed and proactive is key to navigating the challenges of inflation and ensuring financial stability in an ever-changing economic landscape.Got a suggestion? Contact us: editor@connectnigeria.com
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