Herconomy

Inflation is at it's highest in 40 years, but what does inflation really mean?

"Money no get Value" 

As an adult living in Nigeria, we have all made this statement at some point.

Have you ever wondered how money actually loses this value?

Since the beginning of this year, there has been a steady hike in the prices of food items and the cost of living in general. This is a result of INFLATION.

This leads us to the question that has been on the minds of every average Nigerian, What is Inflation and Why are we going through it?

Inflation is a general increase in prices over a given period, which in turn leads to a drop in the purchasing value of money; that is a drop in the quantity or value of items/services the money can provide.

This simply explains why N14,000  can no longer get us a 50kg bag of rice.

During inflation, people that have borrowed money prior to the inflationary period will benefit from the economy because the amount they must repay reduces in value. For instance, if the year-to-year inflation rate is 10%, If someone borrows N500 and spends it on a loaf of bread, by the time they are repaying the N500 a year later, the bread will cost N550; Therefore, the N500 is worth less in the market and it is not as valuable as it was when borrowed, so repaying is not as expensive for the borrower. This process encourages borrowing and lending, which increases spending on all levels and can result in high inflation. 

However, when there is no inflation, deflation occurs. Deflation is a fall in the overall level of prices in an economy and an increase in the purchasing power of the currency, which means that you can spend a small amount of money on several items. 

Deflation is a problem because lower prices mean consumers spend less, which negatively impacts economic growth. Companies respond to falling prices by slowing down production or reducing packaging sizes while maintaining prices, which can lead to unemployment and salary reductions. Although, when mild inflation happens, (I.e just a 3% rise in prices) it can fuel economic growth while high inflation is a problem because it can result in unused labour and resources.

Theoretically, inflation helps increase production.

Do you want to know the major causes of inflation and some tips for tackling inflation? Then look out for our article next week! 

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