Inflation: Sinking Without a Trace
When something is out of your control, you need to accept it. However, you also need to focus on the things you can control while trying to stay positive. Staying positive is not easy. But it is the most rewarding path. It would make the work easier. Do the work, one step at a time. The worst thing you can do is to stay in the quicksand.
Inflation is like quicksand
Pulling me closer, closer
In your arms
Can’t resist your loving charms
You’re like quicksand sinking me deeper
“Inflation can be wind in your sails, it is all about positioning.”
Andy was a brilliant boy with small stature. When he got to college, some big boys would band together and push him around. They would taunt him, telling him to hit back. At times, he would get slammed into lockers and have his launch money stolen. This is bullying in college. There is another subtle bully called inflation.
Many people today struggle from paycheck to paycheck. And inflation is not helping matters. It is like standing in quicksand. You have money in the bank, but the interest rate is in single digits while inflation is in double digits. You decide to invest in bonds only to realize it may take up to 20 years before you can double their investment, or have any significant returns.
It is easier to get unstuck when you have someone to pull you up.
A lady opened a bakery in Lagos. Initially, she was selling well and the business was doing fine. Along the line, the cost of inputs started going up. Baking powder, flour, sugar, butter, everything started increasing. Out of frustration, she began to use strong words on her staff.
One by one her staff started to leave. Some of them joined one of her competitors and the business started to nosedive. She did not know how to manage a bakery. She didn’t know so much about the bakery business- she only saw her friend doing well in the business and decided to go into it as well. Finally, she asked for advice and had to take a course to learn to manage the bakery profitably.
Inflation is a bully. Inflation tells you your salary is no longer able to support the quality of life you once lived. What are you going to do about it?
Inflation Can Be Wind in Your Sails
Inflation is generally caused by a balance or imbalance of two things. First is the money in circulation.
When there is a lot of money in circulation the extended for an increase in inflation. The second is the availability of goods or services.
So when there is an extreme shortage of supply or an extreme spike in demand it can also lead to the rising price of goods and services.
Types of inflation
There are two types of inflation. Demand-pull inflation is caused by demand from customers. Excessively high demand for goods and services causes the price of goods and services to increase. In this scenario, monetary policy is effective in controlling inflation. The second type of inflation is cost-push inflation. This is caused by an increase in the cost of production of firms in the country. The increased cost of production leads to an increase in the rise in the prices of goods and services. The producers transfer the cost the extra cost incurred in the production chain to the customers, resulting in the customers paying more for the goods.
The role of Central Banks
Central banks generally set a target of what they consider to be the ideal level of inflation. They call this “inflation target.” The rule of the central bank is to set monetary policy and monitor how much money is created new money is printed to meet this target.
The ideology is that if an average worker’s salary increases simultaneously as inflation, then that is good for the worker.
On the other hand, If inflation goes up too much compared to a worker's salary then workers are not able to buy as much as they could in the past with the same wages. So, technically the quality of life of such workers has reduced.
Are the central banks printing too much money? The answer to this question is yes. The policy of central banks is to solve big problems such as a sluggish economy or to advance an upcoming financial crash by pushing the problem forward. They try to find a way around the problem by printing a lot more money. This is not always bad and certainly, it has its usefulness. But when the money being printed over a long period of time is too much it leads to inflation.
This makes the naira less valuable over time. Much of these activities created to stimulate the economy and support those who are in poverty is necessary but when it gets to the extreme it risks leading to hyperinflation. It could become so bad that it gets out of hand and no matter the actions taken by the central bank there’s no results they are not able to control it it does not work the the the prescription the patient is not responding to treatment.
Metrics used to measure inflation
There are a number of indices used to measure the rate of inflation. They include the Consumer Price index (CPI) and the Producer Price Index (PPI). These two indices are considered to be important measures of inflation. The Consumer Price Index is a measure of the average change in prices over time that consumers pay for goods and services. A number of household needs and daily needs items are factored in when’s measuring the Consumer Price Index. Items like milk, cereal, transportation costs, housing costs, and the likes are factored in when considering CPI.
Producer Price Index (PPI) is a measure of the cost from the point of view of the industries that produce the products that are consumed in the economy. It measures price from the perspective of the producers.
It is all about positioning
Saving your money in the bank, relying on interest is not the best option because the interest on your capital is negligible compared to the rate of inflation. Put your money to work. Invest in a business. Invest in people. Invest in real estate or other commodities. Get out of cash and get into assets. That way, you benefit from the inflation because assets continue to increase in value where is your cash continues to lose value.
The truth is that the people who are the hardest hits are the low income earners. The rich have assets the rich think differently and they invest in assets which increase in value so the income from their assets take for instance you have a property and the property is fetching you rent so the interest on on their assets pays for the expenses which is that’s the way it should be. But for those who are depending from paycheck to paycheck they will struggle in this economy so the best thing is to keep a percentage of your salary or side and use it as your revolving wealth fund continue to invest it I’ll continue to grow it and that part of your salary is going to be to secure your future.
How Can Inflation Be Managed?
Inflation is the persistent increase in the cost of goods and services over a period of time. A bit of inflation isn’t a bad thing. In fact, it is perfectly normal.
The various stimulus packages released across the world, and the supply bottlenecks caused by COVID mean inflation would be elevated in the short- to medium-term.
A high level of inflation (such as what we have in Nigeria) is a headache. It means within a period of time, money loses a huge chunk of its value.
Long-run inflation in Nigeria is 12% per annum. That means in 4 years, ₦1000, for instance, would have lost ₦480 in value.
So how can inflation be managed? The best thing to do is invest in assets that have a return higher than the inflation rate. Sometimes that may not be possible. In that case, then the next best thing to do is go for returns that are as close to the inflation rate.
You can also invest in currencies that have a much lower inflation rate such as the US dollar or British pound.
On a day-to-day basis, especially for food and other household items, you can consider buying in bulk if the funds are available.
I would like to draw up a 10-year financial plan. How do I go about it?
The first thing to note is that plans are not cast in concrete. The longer the duration of the plan, the likelihood that it will change. A plan, no matter how flawed, is better than having no plan.
The easiest way to achieve this is to break down your plan into yearly plans and even quarterly plans. That way it is easier to measure progress and modify if need be.
You can break down a financial plan into two points: Where you are at the moment and where you intend to be.
Where you are at the moment comprises what you earn, your skillset and your expenses. Growing that skillset leads to an increase in income and ultimately, the sum of money you can invest.
It is perfectly natural for expenses to increase as the years go by. Inflation means things are more expensive. Lifestyle inflation also kicks in. People tend to increase spending as income increases.
Where you intend to be can include expenses that may occur in the future.
At some point, you may decide to have a family of your own. That comes with higher expenses.
It is also important to improve your financial knowledge as time goes.
Retirement is also something one must plan for, especially for the self-employed.
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