By Babajide Komolafe

Inflation is a major threat to building wealth. That is why you must understand inflation, its negative impact on your wealth building efforts, and how to overcome or reduce those negative impacts.

When prices of goods and services are rising continuously, we say there is inflation. Hence, Inflation is defined as persistent general increase in prices of goods and services. This means, an increase in the price of three or four goods and services is not inflation. For the rise in prices to be recognised as inflation, it must be general, covering almost all the goods and services in the country.

The inflation rate is the speed (pace or rate) of the increase in prices. For example, when the price of an item increases from N100 to N150, that is a 50% increase in price. But if the price of the same item increases from N150 to N180, that is a 30 per cent increase. So, while the price of the item is still increasing, we say the rate of increase declines to 30% from 50%.
Naturally and overtime, prices will go up, but what is most important, which is what investors, policy makers and economists focus on, is the inflation rate.

The speed of the increases in prices of goods and services.
Inflation is a major barrier to wealth building because it reduces the value of money. An increase in the price of a commodity reduces the quantity of that commodity money can purchase. Inflation reduces the quantity a unit of money can buy.

By extension, continuous general increase in prices of goods and services, which is inflation, reduces the quantity of goods that consumers can buy.

The first impact of inflation on your wealth building efforts is that it makes you spend more to purchase the same quantity of goods. In Nigeria for example, the quantity of household goods that N50,000 could purchase ten years ago, requires not less than N500,000 today.

In the absence of commensurate increase in your income, inflation makes you spend more for goods and services and as a result, reduces your ability to save and build wealth.
The second impact of inflation on your wealth building efforts is that it reduces the value of savings, except where the interest rate or rate of return is higher than the inflation rate, which is rarely the case.

This means, for you to achieve your savings or investment target, you will have to increase the money you save.

That is why you need to be constantly informed about inflation trends and news. Your wealth building decisions must be inflation sensitive and inflation guided. (To be continued)