What is Inflation? It’s all over the news, and everyone’s always concerned about how it can affect their money – so we thought to break it down for you, and let you know how to protect yourself from it
Inflation happens when things become more expensive over time. For example, think about how much foodstuff you could buy with ₦1,000 five years ago, and how much foodstuff you can buy with ₦1,000 today.
Because prices of things like foodstuff have gone up, you can buy less today than you could five years ago with the same amount of money. This constant rise in the prices of goods is called Inflation, and the loss of your asset value over time is called “wealth erosion”.
Back to inflation – there are several reasons why Inflation might occur, and we’ll go through a few of them below:
As the name suggests, demand-pull inflation occurs when the demand for goods and services exceeds the amount of the same goods and services in supply. This excess demand pushes the price of goods and services upward and causes inflation. A funny example of this would be when hand sanitisers initially shot up in price due to you-know-what.
Cost pull Inflation
This is the opposite of demand-pull inflation – it happens when there’s a fall in the usual supply of an essential good or service. This fall in supply causes scarcity and leads to an increase in the price of not just that good or service, but other costs that depend on it. For example, Scarcity of fuel causes a great increase in the price of fuel and other goods and services that rely on fuel to survive, such as businesses with physical offices, taxis, uber’s and more.
This is inflation caused by exchange rate movements e.g. the depreciation of the Naira to the dollar. How does this happen? When a currency depreciates, importers who buy certain goods and services from abroad in dollars (or other currencies) have to spend more money to get those goods.
They then raise their price to make the money back that they lost. This increases the price of goods and services for the average person.
How Inflation affects your money and how to manage it
The effect of inflation on everyone is the reduction in our purchasing power. This essentially means that we can buy less with the same money because the price of goods and services has risen, without an equal rise in our income and earnings.
This can be terrible, as it makes everyone poorer regardless of what they earn.