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Financial Literacy

Inflation rate, rise and fall explained

Inflation rate, rise and fall explained

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Why FSDH is forecasting a slight increase in Nigeria's inflation rate

This article is written to help explain the confusion that arises with the characterization of inflation rate as a rise of fall. Whenever the National Bureau of Statistics releases its headline inflation rate news outlets often report it in ways that confuse the message to the ordinary Nigerian.

For example, If Nigeria’s inflation rate for the month of June was 16.1% indicating that Nigeria’s inflation rate has fallen for 5 months consecutively. In the same vein, the inflation rate of 16.1% can also be reported as a rise in the month of June. To make matter worse it can also be reported that month on month inflation rose by 1.6% for the month of June. So why all this confusion about rise and fall?

Definition of Inflation

Inflation rate is the percentage rise the average prices of a basket of goods and services from one period (the present) and the corresponding period in the past. It is measured by taking the percentage difference between the base in the current month and the base in the same month in a prior year. This term is called the year on year inflation and is also referred to as the headline inflation rate because that is what is used by you banks, suppliers, clients etc. to rework their pricing. It can also be the difference between the base in the current month and the prior month within the same year. This is called the month on month inflation rare.

Example

Assuming the weighted average prices in a basket of goods and services in June 2016 was 201.7 (the base) and that of June 2017 was 234.2 (new base). The inflation rate will be calculated as the percentage growth between the new base and the prior base which is 16.1%. Therefore, the National Bureau of Statistics will then declare that inflation rate rose by 16.1% for the month of June 2017.

[Read Also: A look at the attendant impacts of the new Customs Exchange Rate]

Does it always rise

By default, the word inflation signifies a rise so any time inflation rate is mentioned it means prices of goods and services rose between one period and another. The opposite of an inflation rate is a deflation, which means rather than rise the prices of goods and services fell. In the example above, if June 2017 base was 198.2, then the Bureau of Statistics will say we had a deflation of -0.01%. Deflation is very rare and usually occurs in countries like Japan. Nigeria has not experienced a deflation in recent history.

So, what do they mean when they say inflation is fallen?

Now to address this confusion, a fall in the rate of inflation basically means that the inflation rate in a particular month is not lower than the inflation rate in a prior month or months. For example, assuming May 2017 inflation rate was 16.25% and June is 16.1% one can assert that inflation rate has fallen in June compared to May. In other words, a fall in inflation is a slow down in the rate of growth in inflation. So even though year on year inflation did rise by 16.1% in June, it fell by 0.15% when compared to May’s 16.25%.

Month on Month Inflation

The Month on Month inflation also follows a similar pattern, just that as in our example, the base for the June 2017, is compared to the base of May 2017. So assuming the base of May 2017 was 230.5 and the base for June 2017 is 234.2, month on month inflation will be the percentage difference between the two which is 1.58%.

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[Read Also: Nigeria’s Inflation drops to 11.08% in July 2019, slowest in 3 years]

Summary

Whenever you hear the word inflation just know that it represents a rise between one base period (the current) and another base the former. A fall only indicates the slower rise in a rise in inflation.

Nairametrics is Nigeria's top business news and financial analysis website. We focus on providing resources that help small businesses and retail investors make better investing decisions. Nairametrics is updated daily by a team of professionals. Post updated as "Nairametrics" are published by our Editorial Board.

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    Financial Literacy

    How to invest for retirement

    Planning for retirement means planning to reduce obligation in the future by investing today.

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    How not to worry about money in retirement

    “If you plan to retire in five years what should you be doing today?” That’s a question I got last week, and talking with the client, a lot came up which I have decided to share.

    First off, What is retirement?

    Nigeria’s public service has an official retirement age of 60 or thirty-five years of unbroken active working service, but in financial planning, retirement is a financial, not a chronological event. Retirement can occur when your passive income can meet your non-discretionary expenses.

    You start to plan for retirement the day you start to earn an income. Your retirement plan will centre on how to generate passive income and reduce expenses. In Financial Planning, Four distinct stages are usually described in a so-called Lifecycle Chart. These are the Accumulation, Consolidation, Spending, and Gifting stages. Chart 1. Financial LifeCycle seeks to segment investing priorities, recommended asset allocation, and risk profile in a chronological timeline as the person gets older. I will take each of these stages and explain how they are linked to your retirement plan.

    READ: How to choose the right Pension Fund Administrator (PFA)

    Chart: Financial Life Cycle

    Early years: Use Your Time and Make Money, (Accumulate)

    The first stage is called the Accumulation stage. Imagine a 22-year-old who has just graduated and is a management trainee. He typically has a low credit score and assets and income are also substantially lower. What he has in abundance is time. So it’s important to deploy his time in the best way to make money. Hence in the accumulate stage, the goal is to generate cash flow either from a job, multiple jobs, working longer hours, saving, cutting unnecessary expenses, etc.

    The key measure in the accumulation stage is the Savings Rate which is essentially how much of income earned or generated has not been spent. On average, the participants in the accumulation stage have fewer dependents and maintenance needs which should theoretically make it easier to save.

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    READ: This thread exposed everything that’s wrong with Nigeria’s VAT

    Mid Years Use Your Money To Buy Assets (Consolidation)

    In the consolidation stage the focus shifts from saving to investing. At this stage, the income earned and credit scores have improved. This is when the talk of buying a home or starting a business takes concrete shape because, at this stage, those dreams can be funded. Hence capacity to take on debt is improved, and debt is used to invest in assets like a home. Remember debt is simply front-loaded consumption, which means we are taking our future income to invest today, intending to repay with future income generated from today investment.

    The key measure in the consolidation stage is the Rate of Return which is essentially how much has been generated from the investments made.

    READ: How to choose the right Pension Fund Administrator (PFA)

    Spending & Gifting Phase; Use Your Assets To Generate Cash Flow and Time (Spending and Gifting)

    Why is it called the spending phase? Because that’s what the individual is doing, spending down accumulated investments. The spending will include buying annuities or perhaps relocating to another city, your dependant’s college needs, etc. At this stage, typically very few are still earning “new” income but are rather spending from the return of prior investments.

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    The key measure in the spending stage is the Withdrawal Rate which is essentially how much of investment can be withdrawn as cash annually to ensure we do not outlive our investments.

    READ: How interest rates impact your wallet

    Retirement is All About Passive Income

    Passive income, which is the income we are making from investing from the accumulation and consolidation stage is now sufficient to generate income and reduce expenses to meet our expenses in the spending/gifting stage.

    To give an example, assume we took a mortgage to buy a house in the Consolidation Stage, in the Spending stage, we pay no rent, thus we save cash, which reduces our Non-Discretionary Expenses. In essence, retirement is planning to eliminate your future expenses to the point where you need less income when you retire.

    What Should You Invest In Before Retirement Or In Retirement?

    Our objective is simple, Income. In retirement, we invest solely to make income to meet our spending needs, Risk profile is also very low because there are fewer recovery options if your investments sink.

    The retirement portfolio is an income-generating portfolio that will be overweight in fixed income products. First, determine what the risk-free rate is. In Nigeria, we can take the yield on a ten-year FGN bond as a guide, this means we can have a target of 10% as our huddle rate for the long term. Thus I will recommend an 80/20 portfolio with 80% going to Fixed Income consisting of long term bonds, REITs, and other top-grade commercial paper.

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    However what happens if we lock in our funds for 10 years at 10% and rates jump to 20%, meaning a loss to our portfolio.  To avoid this risk we can create a bond ladder, where we break down the bulk sum and duration of our total bond investment outlay. Let us assume we have N10m in cash to invest, instead of one single lot investment of N10m, we split into 5 equal investments of N2m and place for 6, 7, 8, 9, and ten-year maturities. This means by the 5th year the first N2m will mature, if rates are higher, reinvest, if rates have fallen then reevaluate.

    READ: 10 Side gigs to venture into while working a full-time job

    What about Equities

    Yes, equities also pay a dividend. In buying equities, we must ensure we are only buying stocks that pay a dividend above our huddle rate of 10% which is the 10-year FGN bond rate. Which Nigerian stock meet that huddle rate?

    • Lasaco
    • Zenith
    • GT bank
    • United cap

    In closing, let us summarize. Retirement is not chronological age. The event occurs when our passive income pays our bills. Planning for retirement means planning to reduce obligation in the future by investing today. Investing in retirement is income-based with a huddle.

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    Financial Literacy

    Steps to take to bag international scholarships

    Here are the steps you should take if interested in pursuing international scholarships.

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    United Kingdom opens window of job opportunities for international students

    Studying abroad gives you exposure among many other things, and that is precisely why many Nigerians have been looking for ways to study abroad. However, not everybody is privileged with the resources to study overseas and this is where the international scholarship option comes in.

    If you are interested in studying abroad and don’t have enough funds, you should consider applying for international scholarships. This article lists the steps you can take to bag international scholarships but before delving into that, here are some types of scholarships available to you as an international student:

    • Location-based scholarships
    • Course or program-based scholarships
    • Sports-related scholarships
    • Research-based scholarships
    • University-funded scholarships
    • Organization-funded scholarships
    • Government-funded scholarships

    Having discovered the types of international scholarships available to you, here are the steps you should take to bag any of these international scholarships.

    Research: Research is vital if you don’t want to miss out on good opportunities or make mistakes during your application. Research scholarship opportunities available in your prospective college or location and be on the lookout for hidden scholarships.

    Check your eligibility: Having done thorough research and discovered the available scholarship opportunities, check to see if you are eligible for them. Many international scholarships have their criteria and requirement, so you should confirm that you are the right fit first.

    Get the required documents: After confirming your eligibility, you should get the necessary documents. If the scholarship requires you to write an exam, prepare for the exam, write a good statement of purpose and prepare all other documents.

    Start your admission process: Some international scholarships require that you start your admission process and probably get the admission before starting your scholarship application.

    Contact past scholarship winners: You might want to contact the previous scholarship winners to know what they did right and how you can learn from them.

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    Apply for the available scholarships: The last step is to apply to every available scholarship.

    The best way to get funds for your undergraduate, postgraduate, or PhD pursuits abroad is by applying for international scholarships. If you do thorough research, you can find fully funded scholarships that won’t require you to pay any amount. One of the essential steps to getting an international scholarship as a Nigerian is staying abreast of current information and this will require you to network with others.

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