Inflation and how it affects your pocket

In the year 2000, the cost of a family-size loaf of bread was N150, today it would cost you about N1000 naira for the same bread. A 900% increase.

The culprit is inflation.

Simply put, inflation means that the general level of prices in a country is going up, which means that more money will need to be paid for the same goods and services than previously, creating the situation mentioned above.

In the example above, N150 was able to get you a family-sized loaf of bread in 2000, by 2022, you need over 6 times that amount for the same item. This means that the purchasing power of the N150 has dropped steadily for 20 years and implies that the value of the naira keeps dropping.

There’s a saying that the “only thing that is certain in life is death and taxes”. It would, however, be quite correct to add inflation to that list.

The prices of items tend to increase not decrease over time, which makes inflation a fact of life as certain as death which you need to prepare for especially if you are from a developing country where the rate of inflation can be quite high and unpredictable.

What are the causes of inflation?

Inflation is caused by either one or a combination of factors. Hold on, it's about to get a bit technical but here goes

An increase in the money supply;

When the amount of money in the system is increased, the prices of goods and services tend to rise which effectively reduces the value of money.

The money supply can increase either through the increase of government spending through salaries or projects or through printing more money.

One of the major causes of the current wave of inflation is that during the COVID pandemic, many central governments implemented policies to keep the economy active. Some of these policies include the reduction of interest rates and quantitative easing which directly led to the increase of money supply in the system, leading to the inflation we are experiencing right now

Raw material prices

The best example is the price of oil. If the oil price increases by 20%, this will significantly impact most goods in the economy and lead to cost-push inflation. E.g., in 1974 there was a spike in the price of oil causing a period of high inflation around the world.

Profit push inflation

When firms push up prices to get higher rates of inflation. This is more likely to occur during strong economic growth.

Declining productivity

If firms become less productive and allow costs to rise, this invariably leads to higher prices.

Higher taxes

If the government put up taxes, such as VAT and excise duty, this will lead to higher prices, and therefore CPI will increase. However, these tax rises are likely to be one-off increases. There is even a measure of inflation (CPI-CT) which ignores the effect of temporary tax rises/decreases.

Effects of inflation on your savings

Nigerians & Ghanaians below the age of 35 are more likely to keep 100% of their savings in a savings account. On average, these accounts return 5–6% per annum before the various bank charges.

Let’s do the math; In 2018, you saved a total of N120,000 in your savings account.

( Assuming you sent N10,000 to the account every month). The average interest rate in 2018 was 9%

So at the end of the year, you should have N130,800 in the account.

But hold up, there are all these pesky bank charges. On average around N1200 p.a, deduct that, and you have N129,600.

So you would have made a whopping N9,600 ($25), not bad.

The problem is, that inflation in Nigeria that year was 12.09% so, at the end of the year, you need to devalue the money left in the account by the inflation rate to get the real value of the money which is N113,912. You made N9,600 and lost N15,688 in value

This means in reality, your money lost more value than it gained in 2018.

Protecting your money from inflation

The first and most important step to protect yourself and your money from inflation is to always have your money in investment options that yield returns above the average inflation rate in your country.

So for example, if the average rate of inflation in your country is 9%, the least return for any investment you should participate in is 11% p.a this will protect your money from being devalued and help you keep up with the constant inflation rate while even earning you a little bit extra.

High yield saving account

Regular Savings accounts by definition don’t have high yields. A lot of banks, however, offer special rates to long-time customers. Speak to your account officer about high-yield savings accounts and how you can benefit from them. It would typically involve locking the money down for fixed terms.

Neobanks are also able to offer higher interest rates because they don’t have overheads as high as traditional banks. They also offer higher-yield products.

Alternative Investment Schemes

The past few years have seen a rise in the alternative investment market in West Africa. Industry experts believe these schemes are riskier than traditional investments (I disagree), they, however, tend to return higher interest rates both in the long and short term to investors.

Some types of alternative investments available to small-scale investors are;

• Real estate investing
• Agricultural investing
• P2P Lending
• Transportation financing etc

Buy and Hold Hard Currencies

Another way to protect your money is to buy and hold hard currencies (USD, GBP, EUR, JPY etc) These are currencies of countries with far more stable and lower inflation rates which means that when you eventually decide to convert back to local currency, your would typically have made a little bit of a profit.

You can open a domiciliary account with your local bank or you can make use of apps that allow you to convert your local currency easily and hold it in the foreign currency of your choice.

Cross-border Investing

At the risk of sounding like a cliche, the world is a global village. This means that you have access to lucrative opportunities from other countries. This allows you to invest in stocks, bonds & real estate in countries with lower inflation rates, in effect protecting your money from inflation in your country.

Digital currencies

Cryptocurrencies

A cryptocurrency, broadly defined, is virtual or digital money which takes the form of tokens or “coins.”

Cryptocurrency values tend not to follow the rules when it comes to inflation and in fact, their values increase during times of economic crisis when people are looking for a safe place to park their money.

Some of the most stable and important cryptocurrencies in terms of market capitalization, user base, and popularity are;

• Bitcoin
• Ethereum
• Solana
• Monero
• Litecoin

Another type of digital currency is called a stablecoin.

Stablecoins

Stablecoins are digital currencies designed to minimize the volatility of the price of the stablecoin, relative to some “stable” asset or basket of assets.

A stablecoin can be pegged to a cryptocurrency, fiat money, or to exchange-traded commodities (such as precious metals or industrial metals). Stablecoins redeemable in currency, commodities, or fiat money are said to be backed, whereas those tied to an algorithm are referred to as seigniorage-style (not backed).

Some popular stablecoins are

• NGNT
• USDC
• TrueUSD
• QCAD
• BUSD

Stablecoins are a way for you to hold foreign and more stable currencies as a form of protection against inflation.

Money 101- Protect yourself from inflation.

Inflation is a thief of value, it’s also inevitable, and it is extremely important that you take measures to make sure your money is not losing value. And while it might seem like small losses, they add up. So you should always be conscious of the rates and be constantly making sure that the measures you are taking are effectively protecting your assets from the adverse effects of inflation.

So what do you think? Are there any other measures to protect yourself from inflation I missed? Let me know in the comments.

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