The National Bureau of Statistics (NBS) on 14 November announced that Nigeria’s inflation, as at October ending, is at an 11-year high of 18.3%, relative to the same time last year.
This means that an item that cost you N100 in October 2015 cost you an average of N118.3 to buy in October 2016. Basically, the price of the item has gone up by N18.30.
Really?
A recent survey by this paper showed that prices of many food items have risen by an average of 50%.
Why the disparity?
Official inflation in Nigeria is measured using what is called “Consumer Price Index (CPI)”, which looks at the prices of hundreds of things that Nigerians commonly spend money on. So, besides food items such as bread, cereal, maize, millet, which Nigerians spend money on, other common expense items are: school fees or education, healthcare, entertainment and transportation.
All these items are put into a single basket and the average change in their prices are calculated to give the CPI, which is referred to as the inflation figure for that month.
Whereas, the prices of foodstuff may have gone up by 50%, the prices of entertainment may have dropped by 30% because the average Nigerian has had to spend money on food, which has reduced the amount of money he has left to spend on entertainment. So, a decline in demand for entertainment leads to reduction in the prices of items in that category.
Thus, the drop in entertainment prices dilutes the rise in the price of foodstuff, leading to a lower average inflation figure; this is why a lot of people doubt the inflation figure when it is released.
So, why does inflation matter?
Simple. If prices of things you need money to buy are going up, and your income is not going up in tandem, it simply means that you are getting poorer. So, anytime inflation goes up, without a corresponding increase in your salary, it means you have just been pushed a notch lower into poverty.
Investments
Inflation also affects the return you are making on your investment. Let us say you have invested N100 and that investment earns you N10 every year. If inflation is at 18.3%, it simply means that you are earning N8.30 less than what you should be earning on your investment so as not to erode your purchasing power in future.
Savings accounts
This is very important for those who keep their money in savings accounts during periods of high inflation as we have now. If the interest rate earned on the savings account is below inflation rate, then you are losing money in the long run.
Pensions
If you are saving for retirement, then if the return made by the pension fund is below the inflation rate, then at retirement you may find out that your pension is too low to meet your basic needs because prices are far above what they used to be and you have not earned enough on your retirement funds to cover up for the higher prices of goods and services.
Interest rates
Inflation also affects the cost of money or interest rates charged on loans. Banks would ordinarily want to ensure that the interest rate they charge on their loans is always above the inflation rate or else they would be losing money.
Central Bank decision on MPR
The Central Bank of Nigeria (CBN) also looks at the inflation rate in setting its benchmark interest rate referred to as the Monetary Policy Rate (MPR), which it sets every two months. The CBN would always prefer that it sets the MPR above the rate of inflation or else the return made on treasury bills (T-Bills) would be negative and this would discourage investors from buying T-Bills and the bonds it sells regularly in a bid to control the amount of money supply in the economy.
And sadly, a higher MPR, the minimum rate at which CBN would lend to banks with overnight liquidity challenges, the higher the interest rate banks would charge on their lending to the private sector.
So, it is clear that inflation matters a lot to the overall wellbeing of all of us. This is why central banks all over world have taming inflation as one of their key mandates.
Anthony Osae-Brown
