Global Markets

Inflationary Pressures

Inflation is the sharp increase in the price of goods and services over a certain period of time. It’s a term in Economics which implies you have to spend more to fill your cooking gas tank, to buy more or to get a movie ticket. When there is a sharp increase in price, money can only buy fewer goods and services, increase your cost of living, and also bring about a reduction in the purchasing power per unit of money and a loss of real value in the medium of exchange.

Inflation affects economies in various positive and negative ways. The negative effects of inflation include an increase in the opportunity cost of holding money, uncertainty over future inflation which may discourage investment and savings, and if inflation were fast enough, shortages of goods as consumers begin hoarding, out of concern that prices will increase in the future. Positive effects include reducing unemployment due to nominal wage rigidity.

Generally the high rates of inflation are caused by an excessive growth of the money supply which tends to cause uncertainty and confusion leading to less investment, reduction in the value of savings although the value of savings can be affected if the interest rates are higher than the inflation. As a result, interest rate on bank loan fluctuate and tend to be on the high side based on too much demand for money, so borrowing rates rises. Investors on the other hand require a higher interest rate based on the type of securities they hold. If an investor invests only in stocks then he will need not worry, historically investing in stocks has been a quite good hedge against inflation because over the long run a company’s revenue and earnings should increase at approximately the same pace as inflation, so the price of stock should rise along with the general prices of goods.

Using Nigeria as a case study, the increase in minimum wage has brought about a conflicting view on whether the increase in the minimum wage will bring about an increase in inflation. Tied to this question is of what effect will a higher minimum wage have on unemployment? istorically, high unemployment goes hand-in-hand with high inflation. While raising the minimum wage might spur more spending and would help stimulate the economy due to the increased spending power of workers receiving higher wages.

According to the National Bureau of Statistics Nigeria’s inflation rate rose to 11.28% year-on-year for the month of September 2018 compared to the 11.23% reported in August 2018 which was the highest inflation rate since May 2018, mainly due to the higher cost of food etc. When the minimum wage is too high it could have deadly effects on the economy and lead to the closing of many substantial small businesses and eradicate existing jobs. Theoretically the increase in inflation will force many businesses to raise prices on goods and services thereby spurring inflation.  An excessively high minimum wage will obviously place inflationary pressure on the economy but when its increase is been kept at the same pace with inflation, inflation will only have minimal effect on the economy.

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