The Effects of inflation on household consumption in Nigeria

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Introduction

The effect of inflation on the consumption patterns of consumers unlike the effect of income on consumer expenditure has not received the needed attention in the marketing environment literature both theoretically and empirically. The effect of inflation on consumer spending is both direct and indirect (Katona, 1975). Periods of inflation influences consumers to save rather than consume because of pessimism and uncertainty in the economy. Inflation again influence consumer spending behaviour by influencing both liquid and illiquid assets since in period of inflation, there is motivation to hold real assets and not assets fixed to nominal values or not indexed to inflation. Household’s income distribution (employers, employees, debtors and creditors) is changed by inflation (Howard, 1978). Inflation may erode the real value of nominal assets and reduces the real value of wealth held in those assets by the households. Cash-out mechanism (mortgage equity withdrawal) in the presence of a long term interest rate in an economy may results from inflation since inflation determines nominal interest rate and savings. Studies have examined the conditions under which inflation influence consumer spending in an economy using both survey data and time series data. The findings are found in the works of researchers such as Eggertsson and Woodford (2003); Eggertsson (2006); Eggertsson (2008); Malmendier and Nagel (2009); Piazzesi and Schneider (2009); Eggertsson (2011); Christiano, Eichenbaum, and Rebelo (2011); Woodford (2011); Coibion and Gorodnichenko (2012); Werning (2012); Correia, Farhi, Nicolini, and Teles (2013); Dr¨ager and Lamla (2013); Romer and Romer (2013); Carvalho and Nechio (2014); Hausman and Wieland (2014); Cashin and Unayama (2015); Farhi and Werning (2015); Jalil and Rua (2015). According to researchers (Doepke and Schneider, 2006; Mian, Rao, & Sufi, 2013) if consumers expect inflation rates to be higher they increase present consumption as a results of a wealth-redistribution channel, given that they have higher marginal propensities to consume out of their wealth.

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