Nigeria’s inflation rate continues to uptick rapidly. Over the trailing 20 months, the year-on-year inflation rate has increased from 11.02% in August 2019 to 18.17% in March 2021.
- Notably, March 2021 inflation rate of 18.17% is at the highest since February 2017.
As has been acknowledged by the Central Bank of Nigeria in its Q4-2020 economic report, a major driver of Nigeria’s current inflation is food price inflation which was 22.95% (March 2021). This is the highest level of food price inflation over the past fifteen years.
- Prior to 2021, the last time food price inflation was over 20% was in July 2008 (20.9%) and prior to that was in October 2005 (24.6%). So, 2021 food price inflation trends are in rarefied territory.
The Nigeria Bureau of Statistics (NBS) publishes a Selected Food Price Watch report, which gives additional context to how prices of some food items are changing. Interestingly, popular food items such as Garri, Maize, Rice, Vegetable Oil, Beans are showing significant YoY price increases of more than 20%.
This excessive spike in food is worrisome, especially if you consider that food-related items comprise 57% of the household expenditure incurred by Nigerians.
In other words, Nigerian households allocate N57 out of every N100 spent, to food-related items.
- This means a 22.95% increase in food prices will result in Nigerians now being expected to spend over N70 out of every N100 on food-related items. Notably, these food price increases are occurring at a faster pace than incomes are increasing.
Why should you be concerned about inflation?
Given that price increases for goods and services continue to outpace income, the question arises about options that exist for Nigerians to mitigate and address the problem of inflation.
Notably, persistently high inflation in an economy creates concerns across the stakeholder spectrum such as:
- Businesses (investment uncertainty) resulting in capital expenditure constraints
- Governments (unemployment concerns due to low business investments)
- Consumers (erosion of purchasing power concerns)
- Investors (real returns concerns to protect and grow wealth).
For consumers, the concerns about high inflation relate to how to avoid its devastating effects in eroding the purchasing power of individuals.
For investors, it is keenness on ensuring that investments are optimally allocated to continually earn real returns in order to protect existing wealth and grow wealth if possible.
What actions can be taken?
Protect your purchasing power from being eroded by Inflation
From a consumption perspective, purchasing power loss/erosion simply means that the number of goods and services a consumer can buy for a fixed amount continues to decline over time. Declining purchasing power affects the standard of living of individuals and forces them to cut back on items.
E.g. if you previously could buy a cup of rice for N100 and 20% inflation results in a cup of rice being sold for N120, it simply means you can only afford less than a cup of rice with the same N100 (which in this example, would be 5/6th of a cup).
The optimal course of action against the loss of purchasing power is to increase your income as aggressively. You can do this by negotiating a wage increase, starting a side hustle (such as online retailing, tutoring etc.), changing jobs, or obtaining additional qualifications to boost your skills and promote your personal brand.
- Nairametrics frequently publishes articles that teach you how to grow your earnings. Some of these articles can be found here, here AND here.
To increase your earnings, you must put as many options as possible in scope as doing nothing is NOT an option.
Protecting and growing your wealth
A key concern for investors is how to protect and grow existing wealth. Investors have a variety of reasons for wanting to protect and grow their wealth. These range from wanting to earn income in retirement, to the desire to transfer wealth to successive generations.
Regardless of the reason, the optimal course of action when seeking to protect and grow wealth is to ensure that your investment portfolio is sufficiently diversified to generate positive real returns (i.e. total returns of your portfolio must at least match or be higher than the rate of inflation).
- Nairametrics covers the performance of multiple asset classes and highlights top-performing opportunities which investors can key into. Sample articles cut across Stocks; Mutual Funds; and Fixed Income. Investors can also seek to include alternatives such as real estate, commodities and new-age digital commodities such as cryptocurrencies and crowd-investment schemes albeit at levels that match individual risk appetites.
Ultimately, you will do well to engage the services of a qualified financial planner to ensure that your portfolio is tailored to your individual needs and risk appetite.
Nairametrics also interviewed a few traders across asset classes.
Udegbunam Dumebi, Fixed Income Trader at UBA Group made it clear that the DMO’s intentions for more borrowing can only be supported by increasing interest rates due to investor concerns about earning real returns to account for inflation concerns. He however cautioned about the debt servicing ratio worsening as interest rates increase on higher borrowing saying: “Looking at the bond market, we are seeing rates go as high as it was in 2018/2019. Before the last inflation rate release, rates were as low as 10% on the U-curve in the bond market. This makes our debt to servicing ratio more expensive, which is a debt issue. For the Bond market, rates are increasing as inflation increases.”
Pascal Nkwodimmah, Finance Manager of Opera Nigeria postulated that surviving inflation would be a factor of how much real investment is within your portfolio. He said: “Investors can diversify their investment amid rising inflation, directing their savings to real investment such as real estate and gold in order to avoid the impact of hyperinflation.”
Ajibola Akamo, Cryptocurrency Expert and Investment Analyst opined that “there will be a bullish reaction by stocks and cryptocurrency markets, but the bond market will be the exception. Naturally, investors will seek avenues to improve their performances to hedge against inflation. This will lead investors to put more stake on riskier assets such as the stock or crypto market.”
Ajibola affirmed that the crypto market is a viable alternative for investment saying: “I believe the crypto space is still at its inception and I believe there will be massive adoption in the future which will translate to significant capital gains for long term investors. Bitcoin is a prime example for this scenario.”
Rising inflation reduces the purchasing power of households and businesses over time. Thankfully, there are investment opportunities that allow individuals and businesses to stay ahead of inflation and grow their wealth. For individuals that may not have extra funds to participate in this market, the only viable option will be to increase their earning power through other options like getting an extra job or starting a small business.
An undisputed certainty is that individuals that hold a large percentage of their assets in cash will experience a loss because of inflation.