Ever wondered what Inflation is, what its effects are, and what the causes of those effects can be?
In the part one of this post, we will answer your questions by first explaining what inflation is and the basic types of inflation that there is.
You remember when somehow in the middle of a conversation, your grandparents or even parents talk about the days of their childhood when a candy bar (sweet) was very cheap, I mean like kobo cheap? In those times, things like sweet didn’t cost much. Today that same candy bar costs between N30-200 in stores depending on the brand.
How does such a massive increase happen? Well that is where inflation comes in.
Inflation is simply a general rise in the price of goods and services over a period of time. It is the rate at which prices of products rise and essentially how much the naira is worth at a given period with regards to purchasing.
Some think inflation can be good for the economy however; the idea behind inflation being a force for good in an economy is that, manageable enough rates can bring about economic growth without devaluing the currency so much that it becomes nearly worthless.
Inflation can have a major effect on an entire country’s economy. It can affect the government as well as an average citizen. Even though many think that certain amounts of inflation are good for a thriving economy, more people think otherwise because inflation can significantly devalue the naira and also be a key contributor to recessions.
An example is say, when the Federal government of Nigeria generally sets an inflation target of about 2% using 2022 as the year in view, assuming that this is the rate that occurs annually. If this inflation rate affects the price of gas, you could most likely pay N200 per kilogram of gas this year and expect to pay about N250 at most at this same time next year right?
The shocker is that, inflation rate does not always work the way the government would probably like it to. We know because if it did, sweet today wouldn’t cost nearly N200 per stick compared to the kobo value it costed a few years ago.
Note also that Inflation can vary from asset to asset depending on the time of year. It is possible for the price of gas to go up separately from overall inflation. Yes you heard right and even, there is a term called “core inflation “- this just talks about an inflation that can be influenced by factors that affect everything except food and energy (gas and oil) because these sectors have separate factors that contribute to them.
Inflation Types
There are many different types of inflation depending on what good is being priced and what the inflation rate actually is.
For example, if the inflation rate is well above the govt. intended target but still in the single digits, this is called a walking inflation because it is concerning yet manageable. When prices go up drastically, it can have a devastating effect on the lower and working class populations who were already struggling financially.
Inflation is said to be running when the rate hits double digits and ends up in the 10%-20% range. This is an obvious greater concern for a country’s citizens, as the currency is devaluing much faster than it needs to be.
Hyperinflation is the rarest, but the most disastrous form of inflation within an economy. This Inflation is totally unmanageable as a rise of 50% or more within a month can cause grave consequences for the economy. It can turn recessions to depressions and lead to a significant decrease in exchange of goods. A lot can really go bad with this sort of inflation.
There is also another one called “stagflation” where inflation rates rise despite the fact that the economy is in a standstill period. Special circumstances can cause stagflation, such as high unemployment rates and negative economic growth in the price of oil in the case of Nigeria.
Inflation is a very critical topic and we believe that as an individual interested in securing your finances and future, having the basic knowledge on inflation can help you avoid certain mistakes in your financial decision making process.
Do you know that inflation can affect you and make you poorer?
We think you should know how. Find all the details here.
Also check out our investment plans that can help secure your finances amidst inflation here.
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