Inflation and all you need to know about it

You aren’t dreaming if it seems like your money isn’t going as far as it once did. Inflation, which is defined as the progressive erosion of the purchasing power of your money over time, is the cause.

Here are all you need to know about inflation, some tips on how to comprehend inflation, and how to safeguard the worth of your money against inflation in Nigeria.

What is inflation?

A consistent rise in the average price of goods and services is referred to as inflation. The Consumer Price Index (CPI), which is normally calculated on a monthly basis by the Bureau of Labor Statistics, reports it as an annual percentage rise (BLS).

Typically, people’s purchasing power declines as inflation increases. That’s not all, though. Fixed asset values are impacted, businesses change the prices they charge for products and services, financial markets reacted, and investment portfolio composition was impacted.

What are the causes of inflation?

Three broad categories may be used to classify the primary causes of inflation:

  • demand-pull,
  • cost-push, and
  • expectations for inflation.

Demand-pull inflation, as its name implies, is brought on by changes in the demand side of the economy, whereas cost-push inflation is brought on by the impact of rising input prices on the supply side. The concept of “inflation expectations” refers to the idea that what people and companies anticipate will happen to prices in the future might affect those prices in the real world.

Read more about the causes of inflation here.

What is Nigeria’s inflation rate in 2022?

According to FocusEconomics, August saw an increase in inflation from July’s 19.6% to 20.5%, which is the highest reading since September 2005. The rise in housing, water, power, gas, food, non-alcoholic drinks, clothes, and footwear prices were the main factors in the outcome.

As annual average inflation increased from 16.8% in July to 17.1% in August, the trend was upward. From 16.3% in July to 17.2% in August, core inflation—which excludes agricultural products, which can fluctuate greatly—rose.

Last but not least, consumer prices increased by 1.77% in August compared to 1.82% in July.

How can you protect your money from inflation in Nigeria?

There are multiple ways you can hedge against inflation in Nigeria. some of them are:

Spend less, save and invest more

Try to cut down as many unnecessary costs that you incur monthly or yearly, as much as you can. Also, know that your inflation anxieties might not be alleviated by just merely putting away money in a bank account.
While it may be crucial to have cash on hand for things like a down payment on a home, the rate of return on a sizable hoard of cash will not outrun the rate of inflation. As of late 2021, the average national rate for a savings account was 0.06 per cent.
Therefore, you should invest more. Your investments tend to provide returns that are greater than the rate of inflation and they usually grow real value in the long run. Your financial advisor can help with the various investment options you can opt for.

Save and invest in other currencies

Holding your money in a currency that is less prone to inflation than the Naira is the simplest and maybe safest approach to prevent it from happening. The value of the Naira will more accurately reflect the rate of inflation if the CBN decides to switch from the current fixed exchange rate regime to a floating exchange
Since they are supported by stronger economies than the Naira, currencies like the dollar, euro, pound, and Swiss francs have done better than the Naira.
Opening a domiciliary account at a Nigerian bank is the most used method of holding foreign cash. However, the procedure can be fairly time-consuming, and you will be responsible for the account’s monthly maintenance fees, but it is definitely worth it in the long run.

Invest in stocks

One other approach to perhaps fighting inflation is to make stock market investments. While individual stock prices may decline, businesses may fail, and indices may even see temporary declines during bad markets, overall stock market indices improve over time, outpacing inflation.
The S&P 500, which monitors the performance of 500 of the biggest U.S. corporations, earned an average annual return of little over 10% from 1920 to 2020, with dividends reinvested.
This is a long-term average; the S&P 500 has occasionally seen lower or even negative returns. The best thing while investing in stocks is to play the long-term game.

Use specialized financial tools

There are specialized financial tools available that may be used to protect assets from inflation. Inflation-indexed low-risk Treasury securities like Treasury Inflation-Protected Securities (TIPS), where the principal amount invested is boosted by the percentage of inflation, are among them.
You must monitor inflation as an investor since it might have an impact on the performance of your portfolio. Keep in mind that in 10 years, one thousand naira now probably won’t purchase as much. You should hedge your bets even if you might not be able to completely prevent inflationary pressures on your assets.