What Is Inflation?

Inflation is a gradual loss of purchasing power that is reflected in a broad rise in

prices for goods and services over time. The inflation rate is calculated as the

average price increase of a basket of selected goods and services over one year.

High inflation means that prices are increasing quickly, while low inflation means

that prices are growing more slowly. Inflation can be contrasted with deflation,

which occurs when prices decline and purchasing power increases.

KEY TAKEAWAYS

Inflation measures how quickly the prices of goods and services are rising.

Inflation is classified into three types: demand-pull inflation, cost-push inflation,

and built-in inflation.

The most commonly used inflation indexes are the Consumer Price Index and the

Wholesale Price Index.

Inflation can be viewed positively or negatively depending on the individual

viewpoint and rate of change.

Those with tangible assets may like to see some inflation as it raises the value of

their assets.

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What Causes Inflation?

There are three main causes of inflation: demand-pull inflation, cost-push

inflation, and built-in inflation.

Demand-pull inflation refers to situations where there are not enough products or

services being produced to keep up with demand, causing their prices to increase.

Cost-push inflation, on the other hand, occurs when the cost of producing products

and services rises, forcing businesses to raise their prices.

Built-in inflation (which is sometimes referred to as a wage-price spiral) occurs

when workers demand higher wages to keep up with rising living costs. This, in

turn, causes businesses to raise their prices in order to offset their rising wage

costs, leading to a self-reinforcing loop of wage and price increases.

Is Inflation Good or Bad?

Too much inflation is generally considered bad for an economy, while too little

inflation is also considered harmful. Many economists advocate for a middle

ground of low to moderate inflation, of around 2% per year.

Generally speaking, higher inflation harms savers because it erodes the purchasing

power of the money they have saved; however, it can benefit borrowers because

the inflation-adjusted value of their outstanding debts shrinks over time.

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What Are the Effects of Inflation?

Inflation can affect the economy in several ways. For example, if inflation causes

a nation’s currency to decline, this can benefit exporters by making their goods

more affordable when priced in the currency of foreign nations.

On the other hand, this could harm importers by making foreign-made goods more

expensive. Higher inflation can also encourage spending, as consumers will aim to

purchase goods quickly before their prices rise further. Savers, on the other hand,

could see the real value of their savings erode, limiting their ability to spend or

invest in the future.

a) Salary and Wages.

b) Balance of Payment.

c) Purchasing Power.

a.) How Inflation Affects Salary and Wages:

1. Reduced Purchasing Power: Inflation erodes the value of money, so

employees’ salaries may buy fewer goods and services if wages don’t increase at

the same rate as inflation.

2. Demand for Higher Wages: As the cost of living rises, workers may demand

higher wages to maintain their standard of living.

higher production costs, which may result in increased prices — causing more

inflation.

4. Delayed Wage Adjustments: In some cases, salaries may not be adjusted

immediately, leading to a real decline in income in the short term.

5. Employer Strain: Small businesses may struggle to keep up with wage

demands during inflation, leading to layoffs or reduced

In summary, if wages do not keep pace with inflation, workers suffer a loss in

real income.

b). How Inflation Affects the Balance of Payment (BOP):

1. Reduced Export Competitiveness: Inflation raises the prices of locally

produced goods. This makes exports more expensive and less attractive to foreign

buyers, reducing export earnings.

2. Increased Imports: As domestic goods become more costly, consumers and

businesses may prefer cheaper imported alternatives, increasing import bills.

3. Trade Deficit Worsens: With falling exports and rising imports, the trade

balance (a major part of the BOP) moves into deficit, weakening the overall BOP

position.

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4. Currency Depreciation: Persistent inflation can lead to a weaker currency,

making imports more expensive and possibly worsening inflation further.

5. Capital Flight: High inflation may reduce investor confidence, causing

outflows of foreign capital, which negatively affects the capital account of the

BOP

Summary: Inflation usually worsens the balance of payment by reducing export

earnings, increasing imports, and potentially weakening investor confidence

c). How Inflation Affects Purchasing Power:

1. Decreases Value of Money: As prices rise, the same amount of money buys

fewer goods and services.

2. Reduces Real Income: If wages don't increase in line with inflation, people

can afford less, even if their salary stays the same.

3. Erodes Savings: The money saved loses value over time, reducing what it can

buy in the future.

4. Hurts Fixed-Income Earners: Retirees or workers with fixed salaries suffer

most, as their income doesn't adjust automatically with inflation.

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5. Shifts Consumption Habits: People may cut back on non-essential goods or

switch to cheaper alternatives due to reduced purchasing power.

Summary: Inflation reduces purchasing power by making money less valuable,

which limits what individuals and households can afford.

Types of Inflation

Inflation can be classified into three types: demand-pull inflation, cost-push

inflation, and built-in inflation.

 Demand-Pull Effect

Demand-pull inflation occurs when an increase in the supply of money and credit

stimulates the overall demand for goods and services to increase more rapidly than

the economy’s production capacity. This increases demand and leads to price

rises.

When people have more money, it leads to positive consumer sentiment. This, in

turn, leads to higher spending, which pulls prices higher. It creates a demand-

supply gap with higher demand and less flexible supply, which results in higher

prices.

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  Cost-Push Effect

Cost-push inflation is a result of the increase in prices working through the

production process inputs. When additions to the supply of money and credit are

channeled into a commodity or other asset markets, costs for all kinds of

intermediate goods rise. This is especially evident when there’s a negative

economic shock to the supply of key commodities.

These developments lead to higher costs for the finished product or service and

work their way into rising consumer prices. For instance, when the money supply

is expanded, it creates a speculative boom in oil prices. This means that the cost of

energy can rise and contribute to rising consumer prices, which is reflected in

various measures of inflation.

 Built-In Inflation

Built-in inflation is related to adaptive expectations or the idea that people expect

current inflation rates to continue in the future. As the price of goods and services

rises, people may expect a continuous rise in the future at a similar rate.

As such, workers may demand more costs or wages to maintain their standard of

living. Their increased wages result in a higher cost of goods and services,

and this wage-price spiral continues as one factor induces the other and vice versa.

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How Inflation Impacts Prices

While it is easy to measure the price changes of individual products over time,

human needs extend beyond just one or two products. Individuals need a big and

diversified set of products as well as a host of services to live a comfortable life.

They include commodities like food grains, metal, fuel, utilities like electricity

and transportation, and services like healthcare, entertainment, and labor.

Inflation aims to measure the overall impact of price changes for a diversified set

of products and services. It allows for a single value representation of the increase

in the price level of goods and services in an economy over a specified time.

Prices rise, which means that one unit of money buys fewer goods and services.

This loss of purchasing power impacts the cost of living for the common public

which ultimately leads to a deceleration in economic growth. The consensus view

among economists is that sustained inflation occurs when a nation’s money

supply growth outpaces economic growth.

The increase in the Consumer Price Index for All Urban Consumers (CPI-

U) over the 12 months ending January 2025 on an unadjusted basis. Prices

increased by 0.5% on a seasonally adjusted basis in January 2025 from the

previous month.1

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To combat this, the monetary authority (in most cases, the central bank) takes the

necessary steps to manage the money supply and credit to keep inflation within

permissible limits and keep the economy running smoothly.

Theoretically, monetarism is a popular theory that explains the relationship

between inflation and the money supply of an economy. For example, following

the Spanish conquest of the Aztec and Inca empires, massive amounts of gold and

silver flowed into the Spanish and other European economies. Since the money

supply rapidly increased, the value of money fell, contributing to rapidly rising

prices.2

Inflation is measured in a variety of ways depending on the types of goods and

services. It is the opposite of deflation, which indicates a general decline in prices

when the inflation rate falls below 0%. Keep in mind that deflation shouldn’t be

confused with disinflation, which is a related term referring to a slowing down in

the (positive) rate of inflation.

Solutions to Inflation:

1. Monetary Policy Control – Central banks can raise interest rates to reduce

money supply and control spending.

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2. Fiscal Discipline– Governments should reduce excessive spending and

borrowing to avoid injecting too much money into the economy.

3. Increase Production – Boosting local production reduces dependence on

imports and helps stabilize prices.

4. Subsidies for Essentials – Provide subsidies on food, fuel, and transport to

ease the burden on citizens.

5. Wage-Price Controls – Temporarily regulate wage and price increases to

prevent a wage-price spiral.

6. Encourage Savings – Promote saving to reduce excess money in circulation

and lower demand.

7. Strengthen Currency Value – Implement policies that stabilize the local

currency to reduce import-related inflation.

8. Support Agriculture and Industry – Investing in key sectors helps reduce

scarcity and price spikes.

Summary: A mix of sound monetary, fiscal, and production-based strategies

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News Stream

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`

Nigeria Inflation Rate Slows in April

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Nigeria’s annual inflation rate fell to 23.71% in April 2025, from 24.23% in the

prior month. Food inflation, the largest component of the inflation basket,

remained elevated but moderated to 21.26% from 21.79% in March, mainly on

account of prices of some items such as maize, wheat, yam and wheat.

References
1. ^ "2020 Appropriation Act - Budget Office of the Federation - Federal
Republic of Nigeria". Archived from the original on 25 September 2020.
Retrieved 27 April 2020.
2. ^ "World Economic Outlook Database, April
2019". [Link]. International Monetary Fund. Archived from the original
on 10 October 2020. Retrieved 29 September 2019.
3. ^ "World Bank Country and Lending Groups". World Bank. Archived from
the original on 28 October 2019. Retrieved 29 September 2023.
4. ^ "Population, total". World Bank. Archived from the original on 29
October 2017. Retrieved 24 June 2021.
5. ^ Jump up to:a b c "World Economic Outlook Database, April
2025". [Link]. International Monetary Fund. Retrieved 29 April 2025.
6. ^ "World Economic Outlook Database, April 2025". [Link]. International
Monetary Fund. Retrieved 29 April 2025.
7. ^ Jump up to:a b c "International Monetary Fund World Economic Outlook
Database April 2021: Nigeria; Gross domestic product, constant prices;

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Percent change". [Link]. Archived from the original on 24 June 2021.
Retrieved 24 June 2021.

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