CBN INTEREST RATE CUT( 2): YOUR PURCHASING POWER, INFLATION AND NAIRA DEPRECIATION – By Chuzy Ezike
Buyer: Aboki how much you dey sell tomatoes?
Seller: Madam, na #1500 for one paint container
Buyer: Haba , tomatoes don cost?
Seller: Yes Madam, na dollar cause am, dollar don cost.
This is common scenario in the market anytime there’s movement in exchange rate.
One would ask ” What has the exchange rate to do with goods and foodstuffs produced locally in Nigeria?”
RELATIONSHIP BETWEEN ABOKI PRICE AND EXCHANGE RATE.
A fall in Nigeria’s currency value ( Naira depreciation) affects the price of commodities in the market. The process typically begins with an immediate jump of the exchange rate which makes the economy uniquely vulnerable to price inflation.
Both the cost-push and the demand-pull factors combine to generate price inflation. On the cost side, the higher cost of imported goods and raw materials are promptly fed into domestic prices. While on demand side, the increase in the demand for domestic goods leads to a further increase in the rate of price inflation.
So , don’t blame Aboki , he is applying common economics.
THE ROLE OF INTEREST RATE CUT
When interest rates are reduced, individuals and businesses tend to borrow more money, causing the economy to grow and inflation to increase.
Each bank loan increases the money supply. And money supply induces the depreciation of exchange rate of Naira against major currencies and leads to increase in inflation. The role of money supply appears significant in influencing food price inflation in Nigeria.
During inflationary period, fixed amounts of money buy less quantity of goods and services. The real value of money is drastically reduced, that is, the purchasing power of consumers are reduced.
YOU AND I
It is easy for most people to feel the effects of price inflation in their daily lives. But rising prices hit the lower and middle classes harder. Higher food, transport fare and utility costs mean less money remains once those necessities are paid for, leaving little or nothing for saving or discretionary spending.
MANAGING THE SITUATION
To manage the rise in prices, consumers tend to buy less, switch to less expensive substitutes or drive further to find bargains.
Smart employers manage their budgets carefully, and look for ways to control spending, not increase it.