Stories by Blaise Udunze
You might hear a lot about rising inflation and cost of living but what do these terms really mean? And most important, how do they affect your daily life?
Nigeria’s headline inflation reading shot up to 15.6 per cent in May 2016, about 1.9 percentage points in excess of the previous month’s record of 13.7 per cent. The latest record did not only indicate a steady rise since last year (except in August 2015), but also showed a six-year high point, matching the same level as in February 2010.
Giving further insight into what drove the increase, the National Bureau of Statistics (NBS) noted that “electricity rates as well as other energy prices continue to manifest as key drivers of the core component of the CPI.”
During the month, the highest increases were seen in the passenger transport by road, liquid fuel (kerosene), fuels and lubricants for personal transport equipment (Premium Motor Spirit) and vehicle spare parts groups.
Likewise, food prices continued to exert pressure on the CPI as increases in both imported and domestic prices pushed food inflation upwards with the food sub-index rising for the seventh consecutive month to 14.9 per cent y-o-y as against 13.2 per cent in April, as all major food groups, which contribute to the food sub-index increased at a faster pace driven by higher food prices in fish, bread and cereals and vegetables groups for the second consecutive month.
Reporting on the food inflation, NBS stated that, “increased prices of both domestic and imported food products continue to drive food prices higher. The index increased by 14.9 per cent (y-o-y) during the month of May, 1.7 per cent points higher from rates recorded in April.
“All groups, which contribute to the index increased with the highest increase recorded in the bread and cereals group, which increased from 14.5 per cent in April to 16.6 per cent in May. On a month-on-month basis, the food sub-index increased by 1.3 per cent points from 1.3 per cent in April to 2.6 per cent in May.
“On a month-on-month basis, the highest price increases were recorded in the bread and cereals; vegetables and sugar, jam, honey, chocolate and confectionery groups. “The average annual rate of change of the food sub-index for the 12-month period ending in May 2016 over the previous 12-month average was 11.2 per cent, 0.4 per cent points from the average annual rate of change recorded in April,” NBS concluded.
Recent developments have impacted on families and homes, as Mrs. Ijeoma Ekeleme, a housewife and mother of two, said prices are rising daily. She wondered why this should be so. “Yesterday, I went to buy my baby’s formula, only to be told that it is now N6,000. I used to buy the same quantity for N4,200. Another nursing mother said only a day before, she obtained hers for N5,600. I argued with her, but now it’s N6,000. I am just left in awe. The development has made us to adjust our spending and we focus on very important things.
“My husband gives me house keeping allowance of N20,000 bi-monthly”, says Mrs. Obi, who lamented that the amount is no longer able to sustain their feeding needs.
“I was forced to ask for an increase recently, as tomatoes have now become a big deal, and that is one commodity my children eat more because they are always asking for rice and stew. N500 worth of tomatoes cannot make a family meal anymore.”
“The other day, I went to buy garri and was told that the quantity, which used to sell for N400 is now N700. I left the shop but after visiting three more stores, I discovered that the price was the same. I returned home empty-handed, as I did not have enough money on me.”
If you think your naira is not stretching as far at the grocery store, you are not imagining things. That is why it is important to understand how inflation affects your cost of living and how to manage its effects.
Difference between inflation and cost of living?
People often use the phrases “cost of living” and “inflation” as if they are synonymous. They are not the same, although closely related. Inflation is the big picture: As the cost of goods and services rise, the buying power of the naira falls. The inflation rate is often measured by the Consumer Price Index (CPI) – a monthly measure by the NBS that averages the cost of a representative basket of goods and services from areas around the country. It then reports the result as a percentage rise or fall.
Cost of living, on the other hand, is a more focused picture. This number averages the cost of an accepted standard of living that includes food, housing, transportation, taxes and healthcare. Cost of living is frequently used to compare life in different locations around the country or the world.
For example, if the inflation rate is 2 per cent, then a cup of garri that costs N1 in a given year will cost N1.02 the next year. As goods and services require more money to purchase, the implicit value of that money falls.
When the going gets expensive
It is easy for most people to feel the effects of cost of living increases in their daily life. But rising prices hit the lower and middle classes especially hard. Higher food, petrol and utility costs mean less money remains once these necessities are paid for, leaving little for savings or discretionary spending. To compensate for the rise in prices, consumers tend to buy less, switch to less-expensive substitutes or drive farther to find bargains.
It is especially difficult to keep up with the rising cost of living when your salary is not growing at a similar rate. The minimum wages for state government workers since 2013 have remained unchanged, while inflation figure had skyrocketed.
How inflation hits the housing market
You would assume that higher inflation means higher prices for real estate, especially rents, and that is often the case, at least, at the start of a significant spike in inflation. But then things can get complicated. To keep inflation rates under control, the Central Bank of Nigeria (CBN) often steps in and raises the interest rate charged to other financial institutions. As the cost of property loans goes up, many consumers are squeezed out of the market, leading to a slowdown in home or property sales. With homes on the market for longer periods, sellers tend to drop their asking price to attract buyers.
The bottom line
With pay increases lagging behind rising inflation, you can expect your bank account or savings to continue to take a beating as the cost of living increases in just about every aspect of daily life. But try to keep your eye on the long term. Although you may need to cut back spending in some areas, don’t let today’s high prices discourage you from saving for tomorrow’s needs.
CBN directs currency dealers to execute trades via FMDQ-advised FX system
Effective August 1, 2016, all foreign exchange trades (FX) by authorised dealers (banks) and companies in the Nigerian forex market will now be executed through the platform provided by the Financial Market Dealers Quotes (FMDQ)-advised forex trading.
The Central Bank of Nigeria (CBN), which gave this directive at the weekend in a circular signed by Dr. Alvan E. Ikoku to all dealers, wants all authorised dealers and corporate institutions operating in the Nigerian forex market to ensure compliance.
Authorised dealers as stipulated in the revised guidelines for the operation of Nigerian inter-bank forex market are licensed participants in the inter-bank foreign exchange. They include authorised buyers, oil companies, oil service companies, exporters, end-users and any other entity the apex bank may designate from time to time.
“Therefore, all authorised dealers (banks) are to execute all FX trades among themselves and with their clients (corporate institutions) through the FMDQ-advised FX systems.
“The deployment of the FMDQ-advised FX systems will only be to those corporates that have been screened and pre-approved by FMDQ in line with its on-boarding eligibility criteria,” the circular read in part.
It should be recalled that earlier guidelines for the floating forex regime had stipulated that all forex transactions by authorised dealers are to be reported to FMDQ via the FMDQ-advised FX Reporting System, which the CBN will have access to.
However, with this on-boarding regime, analysts are divided on its implication on the Bureau De Change (BDC) segment of the forex market. While some analysts believe that since CBN has been holding talks with BDC operators to fashion out modalities for their inclusion, this move could give the apex bank some positive direction on how to “onboard” the BDCs.
But another group believes that forcing companies in the Nigerian forex market to execute all trades through the platform will make things more difficult for BDCs because some of the corporates, especially oil companies, sometimes secretly sell forex to BDCs (autonomous sources). Therefore, this directive has put a stop to that window.