Inflation is the economic situation where the money you have at a given time is not worth as much as it used to be.
This implies that inflation decreases the value of money over time. Essentially, the money available to you today is worth more than the same amount will be worth in the future. The rate at which the value of money fluctuates (decreases or increases) over time is called the Inflation rate.
For context, if ₦1000 can buy you a bag of oranges today, it may cost you ₦1200 to buy the same bag of oranges next year (depending on the inflation rate).
What causes inflation?
Inflation has various causes, but they all revolve around the demand and availability of goods and services.
When it becomes too expensive to produce goods and services, their availability starts to decrease. This will cause suppliers to raise the prices of the available goods and services because they know there is a need for them, and consumers will pay. The type of inflation that results from this is called Cost-push inflation.
On the other hand, inflation is also caused when the demand for goods and services is high, but the goods and services are limited. In this case, buyers compete for available goods and services, and sellers raise prices. This type of inflation is called Demand-pull inflation.
Inflation in Nigeria
According to the Central Bank of Nigeria (CBN), the inflation rate in Nigeria is 11.4% (December 2018). This means that your bag of oranges which costs ₦1000 now will cost ₦1114.40 next year (if inflation rates remain the same). The Central Bank of Nigeria is responsible for taking different measures and creating policies to control the inflation rate in the country.
What to do about inflation
Because inflation exists, it is not enough to put away or pile up money in a safe or just any savings deposit account. Yes, you may have more money than you started with, but there is no guarantee that your money will be worth more than it was worth sometime before. For example, most traditional banks in Nigeria offer savings returns of ~6% per annum. This is way below the inflation rate and means you’re losing out with that saving option. At that return rate, you’re making a loss of 6%.
For this reason, you have to seek ways to earn returns that are higher than the inflation rates. A great way to get ahead is to invest in ventures that protect your money from the effects of inflation and allows you to grow wealth. Some of these ventures include:
– Starting up a business; this will earn you equity
– Buying land; the value of land usually appreciates exponentially
– Funds with high interest rates; if you’re in Nigeria, you can invest in Payvest. With Payvest, the value of your money is protected as you earn interest returns (14 -15.5% per year) higher than the inflation rate.
Investments are aspirational, but if they are a long way off for you because you don’t earn enough yet, you could try effective budgeting and saving till you’ve put away enough to invest.
Download the Paylater app to get instant loans, invest, make payments, and track your finances.