How Can Inflation Be Managed?

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Friday letters are dedicated to taking questions from our community. Do you have a question for us? Please feel free to send an e-mail to [email protected] or a DM to any of our social media channels.

Question

How can inflation be managed? 

Inflation is the persistent increase in the cost of goods and services over a period of time. A bit of inflation isn’t a bad thing. In fact, it is perfectly normal. 

The various stimulus packages released across the world, and the supply bottlenecks caused by COVID mean inflation would be elevated in the short- to medium-term. 

A high level of inflation (such as what we have in Nigeria) is a headache. It means within a period of time, money loses a huge chunk of its value. 

Long-run inflation in Nigeria is 12% per annum. That means in 4 years, ?1000, for instance, would have lost ?480 in value. 

So how can inflation be managed? The best thing to do is invest in assets that have a return higher than the inflation rate. Sometimes that may not be possible. In that case, then the next best thing to do is go for returns that are as close to the inflation rate. 

You can also invest in currencies that have a much lower inflation rate such as the US dollar or British pound. 

On a day-to-day basis, especially for food and other household items, you can consider buying in bulk if the funds are available. 

Question

I would like to draw up a 10-year financial plan. How do I go about it? 

The first thing to note is that plans are not cast in concrete. The longer the duration of the plan, the likelihood that it will change. A plan, no matter how flawed, is better than having no plan. 

The easiest way to achieve this is to break down your plan into yearly plans and even quarterly plans. That way it is easier to measure progress and modify if need be. 

You can break down a financial plan into two points: Where you are at the moment and where you intend to be. 

Where you are at the moment comprises what you earn, your skillset and your expenses. Growing that skillset leads to an increase in income and ultimately, the sum of money you can invest. 

It is perfectly natural for expenses to increase as the years go by. Inflation means things are more expensive. Lifestyle inflation also kicks in. People tend to increase spending as income increases. 

Where you intend to be can include expenses that may occur in the future. 

At some point, you may decide to have a family of your own. That comes with higher expenses. 

It is also important to improve your financial knowledge as time goes. 

Retirement is also something one must plan for, especially for the self-employed. 

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