With inflation reaching an unprecedented peak, Nume Ekeghe identifies the factors that influence pricing and suggests ways to control the trend.
The National Bureau of Statistics (NBS) recently released the Consumer Price Index (CPI) for the month of July. The data showed that inflation which is the rate at which prices of goods and services rise was 19.64 per cent, the highest rate the country had seen since September 2005.
The percentage change in the average CPI for the twelve months period ending July 2022 over the average of the CPI for the previous twelve months period was 16.75 per cent, showing a 0.46 per cent increase compared to 16.30 per cent recorded in July 2021.
On a month-on-month basis, the headline inflation rate in July 2022 was 18.17 percent, which was 0.001 percent higher than 18.16 percent recorded in June 2022. The food inflation rate in July 2022 rose to 22.02 percent on a year-on-year basis; which was 0.99 per cent higher compared to 21.03 percent recorded in July 2021.
The NBS report noted that the rise in food inflation was caused by increases in prices of bread and cereals, potatoes, yam, and other tubers, meat, fish, oil and fat. However, a month-on-month review of the food index saw a marginal but positive reversal to 2.04 percent in July from 2.05 percent in June as a result of a reduction in the prices of some food items like tubers, maize, garri, and vegetables.
The core inflation index, which excludes the prices of volatile agricultural produce, stood at 16.26 percent in July 2022 on a year-on-year basis; up by 2.54 percent when compared to 13.72 percent recorded in July 2021. This was as a result of the increases, which were recorded in prices of gas, liquid fuel, solid fuel, passenger transport by road, passenger transport by air, garments, cleaning, repair, and hire of clothing.
Across some selected states in July, fast increases in food inflation was highest in Kwara, which recorded 29.28 percent, Akwa Ibom with 27.22, and Kogi with 26.08 percent, while Kaduna at 17.16 percent, Jigawa at 17.46 percent and Anambra at 19.25 percent recorded the slowest rise year on year.
After hitting 18.87 percent as an annual average in 2001, Nigeria’s inflation has found comfort in the economy and is unrelentingly way above the apex bank’s target of 6 to nine percent band and above the policy rate, which currently is at 14 percent after the July MPC meeting.
Insecurity, Forex Pressures
Nigeria’s inflation has been on acceleration and continues to make open the obvious and underlying vulnerabilities in the economy. Consequently, the continued expansion of the headline index has always resulted from the sustained price pressures from food and non-food items, which have ensured the uptrend. This is as a result of the fact that insecurity in the country’s food producing regions continues to cap production level, while challenges with logistics and foreign exchange availability remain major pain points.
Notwithstanding, it is without a doubt to say that several crises across the country have continued to stoke inflation numbers in Nigeria. Some of which are: the on-set of the geopolitical unrest in eastern Europe, which has added another layer of inflationary pressure majorly through grains and energy prices; the pass-through effect from the increase in the international crude oil prices and the momentary scarcity of fuel across cities in Nigeria have seen a relatively upward adjustment in the prices of petrol in the past months and this has shown its inevitable effect on transportation prices.
Analysts at Cowry Assets notes that rising inflation rate is due to the combined effect of exchange rate pressure where the Naira has depreciated the more due to dollar scarcity across the FX market and the saturation of money supply as some major culprits; plus, the rate of insecurity concerns in some major parts of the country has contributed to the acceleration of inflation as food supplies were hampered by effects of kidnapping and incessant clashes in some communities.
Commenting on the rising inflation, Chief Executive of the Center for the Promotion of Private Enterprise (CPPE) Dr Muda Yusuf noted that the heightened inflationary pressures in the Nigerian economy remains very troubling.
According to him, the major inflation drivers have not abated, if anything, they have become even more intense. “These factors include transportation costs, logistics challenges, exchange rate depreciation, forex liquidity issues, hike in energy prices, climate change, insecurity in many farming communities and structural bottlenecks to production. These are basically supply side issues. Any mitigation measures would have to be situated in the context of these factors.
“The accelerated fiscal deficit financing by the CBN is a significant inflation driver. The financing of fiscal deficit has been elevated to disturbing levels with huge implications for money supply and consequent effect on inflation. CBN financing of deficit is high-powered money and very inflationary. It is inflation tax.”
Yusuf whilst noting that the mounting inflationary pressures weakens purchasing power of citizens as real incomes are eroded, it aggravates pressure on production costs, negatively impacts profitability, erodes shareholders value and undermines investors’ confidence.
“In many cases, increases in production costs cannot be transferred to consumers. The implication is that producers are also taking a hit. This is more pronounced where the demand for the product is elastic. These are products that consumers can readily do without.”
To the Chief Executive Officer, Global Analytics Consulting Limited, Dr. Tope Fasua said: “The effect is, of course, devastating given the slowdown of GDP growth as the world expects another global recession. The increases in base interest rates have not helped at all as borrowing is a lot more expensive thus making life incredibly hard for companies. The danger we face as individuals is that of spiralling stagflation as incomes stagnate and inflation continues to feed itself in that spiral.
Yusuf who is the former LCCI Director General stated: “Tackling inflation requires urgent government intervention to address the challenges bedeviling the supply side of the economy and the moderation of fiscal deficit monetisation.
This is as Fasua, who noted that with the current situation, companies are likely to lay off and cut operations, said: “We need a big discussion on how to avoid Armageddon. With the expectation that the pace of global inflation will begin to taper from September 2022 as a result of post-harvest supplies, we believe the that the monetary policy tightening effect by the Central Bank will permeate the economy and reflect on the inflation numbers which will bring about slowing momentum in spiraling prices.”
Upward projection
For analysts at Cowry Assets, inflation in August is projected to stand at 20.47 percent year on year, while Afrinvest analysts estimate a further 86bps spike in the y/y headline rate to 20.5 percent in August, supported by the lingering negative drivers.
Analysts at Cordros Research in an emailed note said they “expect the pressure on consumer prices to remain skewed to the upside. Sequentially, we forecast the headline inflation to settle at 1.76 percent month on month in August, translating to an 87bps increase in the y/y inflation rate to 20.52 percent.
