If you open a newspaper or tune in to any news station today, you will probably hear about inflation. There’s been a lot of talk and concern about inflation in Nigeria and it is only natural to wonder what exactly inflation means. As cost of goods and services keep increasing, it is vital to understand how inflation affects you. When you go to the market to buy foodstuff, how does inflation change your costs? If you’re a business owner, how can inflation affect your business plan? How Does Inflation Affect the Common Nigerian? This article discusses inflation and its effects on the common Nigerian.
What is Inflation?
The basic definition of inflation is the increase of prices over a period of time. It is usually expressed in percentage. For example, say the price of a car increased from #5,000,000 (5 million naira) to #5,500,000 (5 million, 500 thousand naira) over a year, the inflation rate would be 10%. Inflation is simply be said to be a period where the purchasing power of a country decreases while prices increase. Usually, inflation happens gradually—around 1-2% per year. However, there are also periods of high inflation. For example, Nigeria’s annual inflation rate climbed to 15.7% in February of 2022 from 15.6% in the prior month, as fuel shortages drove transport costs higher (15.1%), thereby affecting goods and commodities. Food inflation also remained elevated (17.1%).
Nigeria has faced fuel shortages since February after importing substandard fuel, resulting in weeks of severe scarcity and long queues at filling stations. On top of that, a dollar shortage has prompted the government to put restrictions on foreign exchange supplies of certain items, cutting supplies of goods and exerting pressure on prices. The annual core inflation rate, which excludes the prices of agricultural produce, rose to 14.01% in February (the highest since April of 2017) from 13.87% in the prior month. On a monthly basis, consumer prices increased 1.6%, up from a 1.5% rise in the prior month. (Source: National Bureau of Statistics, Nigeria).
Inflation is caused by a combination of four factors. Increasing supply of money, decreasing supply of goods, decreasing demand for money, and increasing demand for goods.
Inflation can be determined for specific goods and services, like the vehicle in the example above or for a wider category such as electrical costs and other utilities. In Nigeria, the most common measurement is the Consumer Price Index (CPI). The CPI measures the change in prices of about 740 goods and services consumed by Nigerians daily. The index weights are based on expenditures of both urban and rural households in the 36 states and the Federal Capital Territory. Inflation is not the only cause of increase in prices. It is however, a noteworthy factor. You’ve probably pulled a face at a higher bill when you buy goods at the supermarket, pay an electrical bill, or visit the restaurant. If you live in a rented apartment, inflation might cause your landlord to raise your rent. Now we know what Inflation is but how does Inflation affect the common Nigerian?
Effects of inflation
Inflation can affect you in different ways, whether directly or indirectly. Inflation directly affects businesses, and since business is part of our daily lives, inflation is relevant to you. Now to answer the question; how does inflation affect the common Nigerian, Let’s look at some of the ways inflation can unfold:
1. Prices increase as purchasing power decreases
This is essentially the definition of inflation and the most obvious impact of inflation. When prices increase, purchasing power decreases. As the value of the naira plummets, things get more expensive to purchase. For businesses, this will mean more expenses for rent, labor, and inventory. These added costs will ultimately be transferred to you, the customer. The common man who relies on his monthly salary will be hit by inflation as his money would be able to buy lesser and lesser.
2. Fewer people can afford certain goods and services
If things are getting more expensive and salaries aren’t increasing to match inflation, budgets will begin to get tighter. This is usually the case for non-essential goods. When essential costs like housing, food, utilities, and healthcare increase, you might find yourself taking out money from your fun budget to cover up for the increase. People might begin to eat out less, travel less, reduce spending on clothes and other purchases. In the long term, more people may begin to live paycheck to paycheck. More of their expenses becomes consumed by their expenses. It is the lower class and low-income earners who really lose out because of inflation as they cannot afford basic necessities like food, clothing and shelter.
From a business owner perspective, this means lower sales and profits for the companies facing declining demand. Sectors that struggle during inflation include consumer discretionary areas (automotive, apparel, home improvement, etc). Financial companies like banks; industrial and transport sectors like airlines and construction; and the materials industry including mining, chemicals, wood and metal, and more.
3. Saving starts looking less attractive
If the value of your naira is steadily decreasing, you may come to the conclusion that it’s better to spend it ASAP. After all, why would you hang onto cash as it’s getting less and less valuable? This is certainly a valid thought! Many people choose to spend their money on assets or invest it in the market when inflation is high. If you have extra cash, you might decide to invest it, whether in a small business, in real estate, buy a new car, or stock up on non-perishable goods. However, the impulse to spend is a double-edged sword, because increased spending can make inflation even worse. Higher demand plus lower supply equals prices rising even more.
(If you’d like to know more about how to invest, read our post which explains how you can invest your money for profitable returns)
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Hi there! I’m Owen, a writer, designer, and a digital marketer. I create and manage content at OG Capital. I am a highly motivated individual who is very passionate about problem-solving. Reach out to me on social media and I will be more than happy to connect with you. Cheers!