What is Inflation?

Inflation is the general increase in the prices of goods and services in an economy.

This means that the purchasing power of money falls. The opposite of inflation is deflation. This is when we see a general fall in prices or an increase in the purchasing power of money.

How is Inflation Measured?

The main indicator for inflation is the Consumer Price Index (CPI). The CPI is a measure of changes in a currency's purchasing power. It tracks changes in the market basket of consumer goods and services purchased by households. According to Nigeria’s official statistical body, the National Bureau of Statistics (NBS), Nigeria’s Consumer Price Index is 15.40% (November 2021), one of the highest in the world.

Types of Inflation?

The three types of inflation are demand-pull inflation, cost-push inflation, and built-in inflation. Demand-pull inflation occurs when the broad demand in an economy far outweighs the broad supply thereby causing a steady increase in the prices of goods and services in an economy. Cost-push inflation is when an increase in the cost of production in an economy leads to a broad increase in the prices of goods and services. Built-in inflation refers to when workers in an economy expect an increase in their salaries or wages in response to increases in the prices of goods and services.

Nigerian Context

In 2020, Nigeria experienced its worst recession in four decades. The current inflationary episode is the result of multiple demand and supply shocks, which have been exacerbated by policy mismanagement and the negative consequences of the COVID-19 pandemic. On the supply side, a combination of insecurity and conflict, which affect food production as well as market access, is driving up food prices. Economic protectionism, as evidenced by the recent land border closure in August 2019, has resulted in higher prices for both food and non-food consumer goods. On the demand side, the absence of a credible monetary anchor encourages firms and consumers to anticipate shock-induced price increases and factor them into their investment and consumption decisions.

Nigeria’s inflation is mainly measured by the National Bureau of Statistics (NBS). Headline inflation (Headline Index) is the raw inflation figure reported by the NBS monthly. The NBS classifies consumption and then measures them for the Consumer Price Index through the 12 classifications of individual consumption by purpose (COICOP).