Sycamore Business Lab

How Inflation affects you and your business

Welcome to SBL021 (Sycamore Business Lab): our periodic blog post where we address issues affecting you and your business.

On 18 February 2020, the National Bureau of Statistics (NBS) released its Consumer Price Index (CPI) report for January 2020, revealing inflation rate to be 12.13%. What exactly does this mean to for you as an individual or a business? Read on to find out.

1. What is inflation?

A simple definition for inflation (which the Central Bank of Nigeria (CBN) subscribes to as well), is a situation where there is a general rise in the prices of goods and services. Inflation is typically persistent and sustained over time (not seasonal in nature).

2. What is the current trend of inflation in Nigeria?

Nigeria’s inflation rate recently increased from 11.98% to 12.13% between the month of December 2019 to January 2020. An increase most believe to be driven by Nigeria’s border closure, which led to an increase in food prices. This means that the CPI which measures inflation increased by 12.13% (year-on-year) in January 2020. This is 0.15% points higher than the rate recorded in December 2019 (11.98%)

This is the fifth straight month of consistent rise as seen below:

  • August 2019: 11.02%
  • September 2019: 11.24%
  • October 2019: 11.61%
  • November: 11.85%
  • December: 11.98%
  • January 2020: 12.13%

This has been the highest inflation rate in the country, since April 2018. Trading Economics forecasts inflation to stand at 11% in 12 months.

READ  Starting a Business? Tips to Consider

How Inflation affects you and your business

3. How does inflation affect you?

Inflation affects you primarily in two ways: as a consumer and as an investor.

As a consumer, inflation influences your purchasing power. Purchasing power is the extent to which the monetary value of the currency in your hand can acquire a certain number of goods and services. The higher the inflation, the lower your purchasing power and fewer things you can buy. For example, when a bag of rice was worth N50, you earned N150 and you could conveniently buy two bags of rice with the extra amount left to spend. In the event of inflation, the price may rise to N100 and you are still earning N150. Now you can only afford a bag of rice because there was only an increase in the price of rice without an equal increase in your earnings. Your ability to purchase a bag or more of rice with a certain currency denomination is called “Purchasing Power”.

As an investor, the prevalent inflation rate affects your real interest rate: that is, the difference between your investment interest rate, and inflation. All smart investors should generally seek to make investments which give them the highest positive real interest rates. Compare the two investment options in the table below, when inflation rate changes:

inflation rate

As you can see from the table above, the same investment (at a constant rate), loses real value when inflation rate increases.

What are your thoughts?

What are your thoughts around investing during a time of increasing inflation? So you have investments whose rates are lower than that of the inflation rate? If yes, what are you doing about it? Share your thoughts with us in the comments section. We would love to hear from you.

READ  How 3 recent CBN policies on cash and POS transactions affects your business
Show More

Related Articles

Leave a Reply

Your email address will not be published. Required fields are marked *

Back to top button