Inflation Explained: Why Your 10K No Dey Last Again

One K no dey last again, Hundred k no dey last again. One million no dey last again, Ten Million no dey last again – Puff n Pass by Zerry DL.

There’s a reason why we love this line so much, we can all relate to it…

Where did my money go?

You know that feeling we all get when we head to the market or a store and everybody is ‘ahhing’ at the price.

Didn’t I just buy this body spray for N1,200 last month? Why is it N3,500 now? 

The simple answer to that question is inflation. 

There is no magical genie trying to increase prices. There are no hidden cabal in the markets making it harder for you to buy stuff. The seller isn’t increasing prices because they are wicked.

It is inflation, my dear. The value of your money has greatly reduced.

I fondly remember my time as an intern at one of the big 4s in 2022. My co-interns and I would stroll to a nearby supermarket for snacks during lunch break. Our personal favourite was the Maryland cookies which cost about N600 then. For everyday we worked from the office (twice in a week), it was often our tradition to buy the biscuit. 

Fast-forward to today, in September 2024, the price of Maryland is now about N2,000. Lol, I have now begun my fitfam journey, so I don’t crave those cookies again. What a totally random coincidence!

What is Inflation? A Simple Breakdown

In simple terms inflation can be defined as an increase in the price of goods and services, which in turn results in people being unable to buy as much with the same amount of money. 

Let’s use a very practical example to explain further. A bag of rice cost about N35,000 last year. Fast-forward to now, a bag of rice now goes for N80,000. This means that the same N35,000 which bought one bag of rice last year, can NOT buy HALF bag this year. 

The value of N35,000 has grossly reduced. 

You may think this means that the market women who sell the rice has more money, but other things the market woman has to buy have also doubled or tripled in price. Her costs of selling the rice and transporting the rice have also increased. In actual terms, she’s probably poorer this year than last year, despite charging much more for rice and earning more in profit. 

As of the 16th of September 2024, the National Bureau of Statistics stated that the inflation in August had decreased to 32.15% from 33.40% in July. These percentages are Year-over-Year (YoY), which means they compare the current rate to the same time last year. 

At 32.15% , it means that, on average, prices are 32.15% higher than they were last year. On average, because the inflation rate reflects the overall change in prices for a basket of goods and services, not just individual items.

Some prices might increase more or less than the average, or even decrease, but the inflation rate gives a general idea of how costs are changing across the economy as a whole. More on this later.

*Most inflation figures you see in the news are YoY, showing how prices have changed over the past year. It is also worth mentioning that inflation figures are announced after the fact i.e. inflation for August will be announced in September and the figure for September will be announced in October.

How does inflation happen?

Once there is a problem, one must first understand the source of that problem. What are the major sources of Inflation? 

In an ideal economic situation, inflation is always happening because the economy is expanding, and demand is higher than supply.

The ideal inflation rate in most situations is around 2% or 3% per year. That means that in an ideal situation, there is an annual 2-3% increase in price. Today, Nigeria has an inflation rate above 30%. That’s a powder keg.

The first major cause of Inflation is the Demand-Pull. It usually happens when the government unnecessarily supplies money to the market (prints too much money).

When the government supplies too much money into the market, the “price” — which is the value of the money — will drop. Just like it would happen with any other good. 

People will have more money and want to buy more stuff – but then prices go up since there isn’t enough stuff. This is commonly referred to by economists as ‘too many dollars chasing too few goods.’ 

The second cause of Inflation is the Cost-Push Inflation. This refers to a situation where the increase in the price of goods is caused by an increase in the cost of production. An increase in the price of any of the factors of production such as labour, capital and raw materials can lead to this kind of inflation. 

Due to the epileptic power supply in Nigeria, an increase in the price of fuel would lead to an increase in the price of goods to be produced. Increase in the price of salaries could also lead to Cost-Push inflation. 

The last type of inflation we’ll look at is built-in inflation. Built-in inflation happens when inflation becomes a normal part of the economy due to past inflation caused by the earlier mentioned demand-pull or cost-push factors. People start expecting inflation to continue, so workers demand higher salaries, and businesses raise prices to cover these costs, creating a cycle.

For example, if workers think prices will keep going up, they’ll ask for higher salaries to maintain their standard of living. Employers, in turn, raise prices to cover these salaries increases, and this keeps the inflation going. This cycle of rising salaries and prices is called the price/wage spiral.

When the National Labour Congress (NLC) pushed for a higher minimum wage, many supported the idea. But when they suggested N600,000 as the new minimum wage, it faced criticism for being unrealistic and because it could cause extreme inflation. How would companies afford such wages/salaries without increasing the prices of goods and services? 

Everyday Examples: How exactly does inflation affect the average Nigerian

Whilst writing this article, I took a break to check on the price of a bolt ride from my residence in Yaba Mainland to Lekki Phase I on the Island, and it costs roughly N9,000. I also went to check my previous bolt receipts from the previous years from my email, and this exact same trip cost about N3,000 two years ago. 

Before you dismiss this as ‘big man wahala.’ This morning whilst rushing to work, a bus ride on our popular Lagos Danfo from Yaba to Obalende cost a whopping One Thousand Nigerian Naira (₦1,000). Only about two months ago, I could get the same route for about 400-500 Naira. This was caused by an increase in the price of fuel per litre, with NNPC selling at about 850 naira and other stations selling at 1000 naira per litre.

• Students: Honestly, I’m just glad I’m no longer in school. Imagine trying to balance academically demanding courses whilst not being able to eat properly. I know some of my friends, if they were still in university today, would have dropped out to focus on quick money-making activities, like Sporty. 
  
  
• Entrepreneurs: Running a business in Nigeria is extremely difficult. The rising rate of inflation makes it even worse. A baker must factor in the increasing prices of butter, sugar and flour in the prices of cakes and breads. This is even worse when taking into account other costs of running a business such as diesel costs and wages/salaries.
  
  
• Salaried Workers: I personally think this group is the worst hit by inflation. Entrepreneurs can always increase the price of goods to break even, and especially when its essential items are being produced, people will always find a way to buy it. However, salary workers do not have this luxury. The prices of items have practically doubled, but more often than not, the prices of salaries are rarely increased or not even increased at all. Imagine being a salary earner in a customer facing role, like being a bank cashier. You’d have to literally shuffer and shmile, like Fela sang. 
  

How inflation leads to higher unemployment

When inflation rises, the cost of goods and services goes up, which makes life more expensive for everyone. To manage inflation, governments or central banks might raise interest rates, which makes borrowing money more expensive. This reduces spending and investment, causing businesses to slow down production or cut back on staff, leading to higher unemployment.

Additionally, as businesses struggle with rising costs (like wages), they might lay off workers to save money, increasing unemployment further.

How is inflation measured?

The main way to measure inflation is through the Consumer Price Index (CPI). In Nigeria, the CPI tracks changes in prices for 740 items and services. It reflects the spending habits of both city and rural households across all 36 states.

Inflation is measured using a weighted system, meaning that not all the 740 items have the same impact. Items people spend more on, like food and housing, are given more weight, so changes in their prices have a bigger effect on the overall inflation rate.

Key categories in the CPI are:

• Food & Non-alcoholic Beverages: 52%
• Housing, Water, Electricity, Gas & Other Fuel: 17%
• Clothing & Footwear: 8%
• Transport: 7%
• Furnishings & Household Equipment: 5%

Other categories include Education: 4%, Health: 3%, Miscellaneous Goods and Services: 2%, Restaurants and Hotels: 1%, Alcoholic Beverages, Tobacco & Kola: 1%, Recreation & Culture: 1%, Communications: 1%.

The CPI shows how the average prices of these items change over time. 

How can inflation be controlled?

Inflation can be controlled with a contractionary monetary policy- this involves reducing the amount of money in supply.

One of the ways of doing that is by raising interest rates. On the 24th of September, the CBN once again raised the interest rate to 27.25 per cent from the 26.75 per cent announced in July 2024.

When interest rates go up, it becomes more expensive to borrow money, so people spend less, causing prices to drop and inflation to slow down. But this also means that the economy doesn’t expand as quickly. 

While raising interest rates can shrink the economy by reducing demand, it is effective in slowing down inflation. There is a limit to how far the CBN can increase the interest rate so as not to adversely affect the economy.

Apart from the monetary policy, the other ways inflation is controlled are:

• Fiscal Policy: Governments can reduce spending or increase taxes to lower the demand for goods and services, which can help curb inflation. Reduced government spending means less money circulating in the economy.
  
  
• Supply-Side Policies: Encouraging productivity, investing in infrastructure, and removing barriers to production can help reduce the costs of goods and services, making inflation more manageable in the long term.
  
  
• Wage/Salary Controls: Moderating salary increases can prevent the wage-price spiral, where higher wages/salaries lead to higher prices. Negotiating fair but sustainable wage growth helps to balance costs.
  
  
• Import Substitution: Reducing dependency on imports by boosting local production helps reduce inflation caused by foreign supply shocks or currency fluctuations.
  
  
• Reducing the cost of Power/Energy: Since high energy costs can make things more expensive, using energy more efficiently or finding other sources of energy can help lower the effects of rising fuel prices.

In short, tackling inflation in Nigeria needs a well-rounded approach that goes beyond just traditional money policies.

Global Inflation: It’s Not Just a Nigerian Thing

Contrary to what most Nigerians believe, Inflation is actually a global thing. It pretty much affects every country of the world. Now this is not to downplay our very high inflation rate in Nigeria.  (33% no be child’s play!) . 

However, controlling inflation on a global scale has become more difficult due to recent events like pandemics, wars, and other crises. For example, energy prices were already rising before the COVID-19 pandemic, and events like Russia’s invasion of Ukraine and the Israel-Gaza conflict only worsened the situation. 

How to Protect Yourself during Inflation

It is important to remember that simply saving money is not enough to protect oneself during inflation. This is so because the money you saved cannot still buy enough items if it is not also increasing.

To wrap it up, inflation is a rise in prices that affects the cost of living, and its impact can be harsh on everyday life. While the Central Bank of Nigeria works on ways to control it, there are things we can do to manage its impact. This means making smart money choices, finding different ways to earn, and investing in ourselves to stay ahead.

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