MINTWhat is inflation?
Why prices rise, how Ghana measures it, what it does to your savings, and how to check whether your money is keeping up.
Read at your own pace. A video for this lesson is on the way.
A simple explanation
Inflation is the general rise in prices over time. When inflation is 20%, something that cost GHS 100 a year ago costs about GHS 120 today. Put another way, each cedi buys less than it used to. Economists call this a loss of purchasing power.
In Ghana, inflation is measured by the Ghana Statistical Service using the Consumer Price Index (CPI). The CPI tracks the prices of a basket of everyday goods and services, such as food, transport, rent, utilities and clothing, and shows how much that basket costs compared with a year earlier. The Bank of Ghana sets interest rates partly to keep inflation near its target.
Why prices rise
Several things push prices up:
- Higher costs for businesses. Fuel, transport, electricity and imported goods cost more, and businesses pass this on.
- A weaker cedi. Many goods are imported, so when the cedi falls against the dollar, the cedi price goes up.
- Strong demand. When more money chases the same amount of goods, sellers can raise prices.
- Supply problems. A poor harvest or a disruption in transport can push up food prices.
Example
Ama keeps GHS 10,000 in a savings account that pays 10% a year.
- After one year she has GHS 11,000.
- Inflation over the same year was 20%. Something that cost GHS 10,000 a year ago now costs GHS 12,000.
- Her balance grew, but it now buys less than before: GHS 11,000 against a price of GHS 12,000.
Her real return is about -8%. You can work it out more precisely with:
(1 + your return) ÷ (1 + inflation) − 1 = 1.10 ÷ 1.20 − 1 = about −8.3%
If inflation had been 5% instead, the same account would have given a real return of about +4.8%, and her money would have gained buying power.
Why it matters
Inflation is why keeping all your money idle is not "safe". Any savings or investment return should be compared with inflation. It also affects your plans:
- A savings goal of GHS 50,000 today may need much more in five years.
- A fixed salary buys less each year unless it is raised.
- Loans at fixed rates can become easier to repay when inflation is high, while cash savings suffer.
A feeling for scale
Ghana has seen high inflation in recent years, including a peak above 50% at the end of 2022, and it has come down since. The figure changes every month, so always check the latest published number. Even moderate inflation adds up over time.
The Rule of 72 gives a quick estimate: divide 72 by the inflation rate to see roughly how many years it takes for prices to double. At 12% inflation, prices double in about 6 years. At 6%, about 12 years.
Key things to know
- Real return = your return minus inflation (roughly). A positive real return means you are gaining buying power.
- Inflation affects people differently. If you spend mostly on food and transport, your personal inflation may be higher or lower than the national figure.
- Check the latest number on the Ghana Statistical Service website before comparing it with a return.
- Protect yourself: look for savings and investments that aim to beat inflation over the time you need, such as T-bills, bonds, funds or shares, and understand their risks. See investment types in Ghana.
- Raise your income: skills, side income and salary reviews help keep pace.
- Keep an emergency fund, but avoid holding large amounts in cash for years. See how much emergency savings you need.
Risks to consider
- Planning with old inflation figures can make your targets too low.
- Chasing high returns to beat inflation can lead you to risky products or scams. See how to spot investment scams.
- Inflation can change quickly, so review your goals at least once a year.
Key takeaway
Inflation shrinks what your money can buy. Always compare returns with it, using real return, and review your savings plan every year.
Sources: Ghana Statistical Service, Bank of Ghana