Inflation is the general rise in the price of goods and services over time. When an economy faces high inflation, people have to spend more money to buy the same quantity of goods and services before the rise in inflation.
Nigerians often complain that even when official statistics show that the inflation is falling, they don’t feel the impact in their everyday lives. To understand why this is so, we must understand how the National Bureau of Statistics (NBS) calculates the inflation rate.
To calculate the inflation rate, the NBS first needs to construct a consumer basket to determine what consumers spend their money on, whether it is garri, transport, or healthcare, and each good or service is assigned a weighting to reflect its importance. Every month, the NBS surveys how the prices of goods within this basket have changed across the 36 states.
Those weightings are supposed to reflect how much a consumer spends on a particular good, and are often estimated using NBS assumptions. If we spend more money on garri than school fees, then garri will be given a higher weight and will have a larger effect on the final inflation figure.
But of course, different people and households have different consumption patterns—a wealthy family with three kids would spend a lot more on school fees than a poor single man, and the final inflation figure would then reflect that family's experience.
Why is this so?
In a nutshell, the average Nigerian will most likely feel the reported inflation rate differently from the next person because they don't have the same consumption pattern. And because the NBS does not capture the consumption pattern of every single Nigerian, the figures will not reflect how inflation affects every individual. The numbers are generalised, so person A, who spends more on alcohol and luxury items is likely to feel rise of prices differently from person B, who spends less on alcohol and consumes more non-luxury items.
You can see this in practice when inflation is calculated for different states, with each state using a different consumer basket. Kwara’s inflation rate in June, for example, was 8.2% while that of Rivers was 13.8%. These rates differ and affect people diversely because different cities consume different services and goods, which will determine the final inflation figure for the state.
It is pretty much impossible for the average Nigerian to feel the effect of falling inflation exactly the same way the inflation rate figures suggest. What a person buys determines his or her inflation rate, and it is not a stretch to say that the NBS cannot make 180 million different inflation rates to account for every individual.
Follow this Journalist on Twitter @AishaSalaudeen. Subscribe to read more articles here.