Finance & Investment

Clearing the Air on Economic Data: Understanding Inflation

The National Bureau of Statistics (NBS) is the public authority responsible for
tracking relevant data on the Nigerian economy. The head of NBS, Dr. Yemi Kale,
maintains an active presence on social media, most notably twitter. He is keen on
engaging his followers on different economics issues, and getting them to appreciate the data that the agency publishes.

One of the most important data for any economy is the inflation rate. It is the key
data Central Banks look at when making monetary policy decisions. The inflation
rate is also the economic data that attracts the most attention from the general
public. Or at least so it seems judging by the response Dr. Kale gets whenever he
tweets about recent releases by NBS.
We all care about inflation because of its effect on our lives and personal finances.
Rising prices means that the currency you have in your wallet is worth less. It also
makes for difficult planning for individuals and businesses alike, since you don’t
quite know where or when prices will settle. Inflation also has a disproportionate
effect on lower income groups, given that more affluent members of society own
investments in assets (such as property) that appreciate in value during periods of
high inflation.

It is understandable that inflation data gets Dr. Yemi Kale’s twitter followers excited.
Data by NBS shows that the inflation rate in Nigeria has been declining for 18
months consecutively, up until August 2018, when recently released NBS report
revealed a break in the downward trend.
18 months of uninterrupted slowdown in inflation should be good news, right?
Well, technically, yes. But many of Dr.Kale’s followers don’t seem convinced.
Following each NBS inflation data released over the past 18 months, Dr. Kale’s
twitter has been barraged with tweets from followers for whom the numbers just
don’t click. Some go so far as refuting the data: inflation is not decreasing, because
prices of goods and services being purchased by consumers in the country are ‘still rising’. That is the usual line of thought.

So, what’s the deal?

The issue simply has to do with a lack of proper understanding of how to interpret
the reported inflation figures.
That the inflation rate has been decreasing does not mean that prices are falling.
Inflation measures the rate at which prices have increased over a particular time
period. Reported on a year-on-year (y-o-y) basis, the inflation rate tells us the rate at
which prices of goods and services in the economy have increased compared to the
same period in the preceding year.

So, while Nigeria’s inflation rate has witnessed consecutive decline for 18 months y-o-y, it doesn’t not mean that prices have ‘declined’ over that period. It simply points to a reduction in the rate at which prices are ‘increasing’. In economics, this retreat in inflation is referred to as disinflation. When the prices of goods and services across the economy decline over time, the economy finds itself in a situation called deflation.

And that is a topic for another day.

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