ECONOMY - 16 AUG 2018

Explainer: What is Inflation?

Explainer: What is Inflation?
The Central Bank of Nigeria has the responsibility of dealing with inflation in Nigeria

In Brief

Inflation is the general rise in prices of goods and services over time. Inflation has the effect of reducing the value or usefulness of the money you have. Someone who used to buy a basket of tomato for ₦400, for example, would find that he needs to pay ₦450 to buy the same basket.

We track inflation through the Inflation rate, which measures how prices change over a specified period—usually a year. So, the July 2018 inflation rate measures how prices have changed relative to the previous July.

People often incorrectly interpret inflation as prices. Inflation can fall from 10% in June to 5% in July, and in both cases, the inflation rate suggests that prices rose; the difference is that prices rose faster in June than in July.  

 

Dig Deeper

There are broadly two causes of inflation (i.e. two main reasons why prices rise). The first is that the cost of producing goods or services increases. Companies usually respond to higher production costs by increasing prices. This is known as cost-push inflation.

For example, when the naira depreciates, imported goods become more expensive. Firms that rely on imported raw materials increase their prices to protect their margins.  

The other main cause of inflation is demand. A basic law of economics is that a higher demand for a product will push up its price. So, when demand rises in the economy and producers are unable to supply quickly enough, prices tend to rise. This is called demand-pull inflation.

 

Context

The Central Bank of Nigeria—not the Government—is in charge of trying to control inflation in Nigeria. The CBN has a target range of 6%-9%, much higher than 2% in the United States and United Kingdom. At the moment, the rate sits at 11.1% (July 2018).

Nigeria’s inflation rose from 9.6% in January 2016 to 18.7% in January 2017, before falling back down to current levels. The main cause for the increase in the rate since 2016 was the depreciation of the naira. The crash in oil prices made foreign investors flee and caused a scarcity of dollars which caused our currency crisis. The resulting effect? Rapid inflation.

 

Follow this Journalist on Twitter @AishaSalaudeen. Subscribe to read more articles here.
 

Aisha Salaudeen

Aisha Salaudeen

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