Economics

Inflation

Inflation is the rise in price of goods and services. The hike in price definitely affects the economy in a subtle manner. Inflation is an erosion of the value of money or anything that has a monetary value. It has its types, causes, effects, and control measures.

Inflation is a common economic phenomenon in every economy. Nigeria has her experience of inflation as it rises and the control measure offered by different administration with their reforms.

Types of Inflation

Wage Inflation: This is also known as Demand Pull inflation. This is a situation that arises when the demand for goods and services exceed the supply. This leads to competition that in turn causes a hike in the price of commodities and services.

Cost Push Inflation: This is the rise in price that is caused by increased cost incurred in the production process of goods and services.

Pricing Power Inflation: is a type of inflation that is caused by the deliberate act of the industries and entrepreneur to increase their profit margin. It is also known as the Oligopolistic Inflation

Sectoral Inflation: The hike in price is a result of price increase in certain sectors of the economy which will definitely have a ripple effect. For example, a rise in the price of fuel will lead to an increase in transport fair, prices of goods and services, and so on.

Fiscal Inflation:  Excessive government spending is the cause of this type of inflation.

Hyper-Inflation: This is an extreme case of inflation. It is also known as Galloping Inflation or Runaway Inflation. It is an unusual case and it affects the economy adversely. We have a hype-Inflation case during or immediately after a war.

Core Inflation:  This puts into consideration all the items in the basket without food and energy which are highly volatile.

Headline Inflation:  In this case as different from the core inflation, the headline inflation puts into consideration the highly volatile items i.e food and energy.

Measures of Inflation

Inflation is usually measured by estimating the inflation rate using the price index. The inflation rate is the percentage rate of change in indexes over a given period of time. The inflation price indexes are:

• Producers price index
• Commodity Price index
• Core price index
• GDP deflator
• Regional Inflation
• Historical Inflation
• Asset Price Inflation

The Effects of Inflation

This could be positive or negative.

Negative

• Hoarding
• Shoe-Leather Cost
• Menu Cost
• Allocation efficiency
• Hyperinflation
• Sets off Business cycle

Positive

• Labour market Adjustment
• Debt relief
• Tobin Effect

Room to Maneuver

   Government Bonds

   Government bonds are risk free debt instrument backed by the credit and taxing power of a country. It is an instrument for controlling the supply of money in an economy. It is also a form of long term investment for investors. It aids long term economic plans and so on.

Definition of Bond Related Terms

• Broker - Any person engaged in the business of effecting transactions in securities market for the account of his customer for a commission.
• Broker/Dealer - Any entity, other than a bank, engaged in the business of buying or selling Securities on its own behalf or for others.
• Competitive Auction – An auction in which securities are sold to the highest bids. Successful bidders are awarded securities at the prices that they bid.
• Customer - Customers are all Non-Primary Dealer institutions or individuals that purchase or sell Government Securities or engage in Repurchase Agreements in Government Securities with a Primary Dealer.
• Dealer - An entity that stands ready and willing to buy a security for its own account (at its bid price) or sell from its own account (at its ask price). Individual or firm acting as a principal in a securities transaction.
• Dutch Auction – An auction in which the lowest price necessary to sell the entire offering becomes the price at which all securities offered are sold.
• Government Securities - Securities whose principal or interest is guaranteed by the government or its agents.
• Government Securities Dealer - A dealer in government securities.
• Inter-dealer brokers - An intermediary between dealers in securities who matches ‘best’ bids with the ‘best’ offers to arrive at the right price.
• Primary Dealers - Dealers appointed under the Primary Dealership system.
• Primary Dealer System - A system whereby some institutions are given exclusive rights to purchase/underwrite all securities issued for resale.
• Primary Markets - The market in which new securities are issued by corporations in order to raise capital.
• Regulatory Authorities - Regulators of different operators in the capital market i.e. Central Bank of Nigeria (CBN) for banks, Securities Exchange Commission (SEC) for capital market operators and Nigerian Stock Exchange (NSE) for members registered to trade on the floor of the exchange.
• Repurchase Agreements - A short-term loan agreement by which one party sells a security to another party but promises to buy back the security on a specified date at a specified price.
• Secondary Markets - The market in which previously issued securities are traded among investors.
• Securities - Instruments that evidence the holder’s claim against a firm or government.
• Securities Exchange - An organized market for purchase and sale of securities such as a Stock
• Exchange.