“Diesel could rise to N1,500 per litre”, was a screaming headline across several online media platforms including Nairametrics during the week. Marketers pointed to rising commodity prices, difficulty to access forex and distribution bottlenecks as major concerns.
These are just one of the fallouts of that evil economic phenomenon called inflation. Inflation is the number one enemy in the world today and that is because it is killing the financial aspirations of countries, businesses, employees, and anyone who saves, invests, or spends money.
Earlier this week, the National Bureau of Statistics reported that Nigeria’s inflation rate for the month of May 2022 galloped to 17.7%, the highest in about 11 months. Across the world, the same appears to be the case. From the United States to Europe and Asia inflation is ravaging nations forcing central banks of most countries to raise interest rates at a pace not seen in decades.
While the central banks continue to grapple with taming high inflation, investors are also having to deal with a crashing stock market, catering to the cryptocurrency market, and a generally grim view of investing across all spectrums. The purchasing powers of individuals and retail investors are being decimated and it appears there is no end in sight, at least in the short to medium term. This is a sticky inflation which means it is not going anywhere soon.
So, what do we need to do to avoid getting your finances ravaged by inflation? Some of the cost-effective ways of fighting inflation are owning what economists refer to as “inflation-proof assets” such as real estate, dollar-earning assets or simply selling “Giffen Goods” which are low-income goods that record higher demand despite price increases. But while these investable assets address investments in items that are inflation-proof, there is a different approach to dealing with spending on goods and services that are frequently impacted by inflation.
For a lot of Nigerians, prices of everyday consumables and inventories have more than doubled over the last one year and it is not likely to end anytime soon. To mitigate these trends there are pragmatic actions that can be taken to reduce the effect of high inflation.
One of the most effective “inflation hedging” moves you can make is front-loading cost. Individuals who have financial resources should consider paying in advance for inflation-susceptible items they may not need now but later to avoid having to pay more when the price may have risen. For example, if the prediction of oil marketers that diesel prices might increase to N1,500/litre is anything to go by, then we are looking at a 90% jump in prices between now and the end of the year.
This will affect things like electricity bills, transportation (local and air) and any other cost associated with diesel as an input. Last year, my power supplier indicated they were going to increase electricity tariffs from about N120/KWh to N180/KWh and gave an indicative date when the switch will occur. I immediately purchased 3000KWh totalling about N360,000. Within months, the bill had risen to about N250/KWh a whopping 100% change in price.
The above example also suggests those who have access to borrowing to front-load costs can do so if the items they want to pay for are likely to rise faster than the interest rates they will be charged. For example, an item that cost N1 million today but could see its price rise to N1.5 million in less than a year will be cheaper to buy now if you borrow at say 20% per annum and then pay for it now. It is the sensible thing to do in a high inflationary environment. Smart companies know this too and that is why most will either prepay for highly critical orders or issue purchase orders at a competitive price now in exchange for payment later.
The common factor in all the options above is money and it is those who have the resources that can take good advantage of the options available. If you have the cash, in a high inflationary environment, spend it and only worry about how to make more money.