Taming heightened inflationary pressure

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As inflation in Nigeria continues to rise, JOSEPH INOKOTONG writes that it will be difficult to achieve price moderation through adjustments by the monetary authority alone without the complementary efforts of the fiscal arm of the government.

THE surge in inflationary pressure in Nigeria has been worrisome and unprecedented with its attendant economic hardship the citizenry is being subjected to. The rate and pattern of rise in inflation rate have become easily predictable by analysts.

As an economist had projected last week Monday the National Bureau of Statistics (NBS) released the monthly Consumer Price Index (CPI) report for December 2023. The data showed that in December 2023, the headline inflation rate rose to 28.92 percent relative to the November figure of 28.20 percent.

Looking at the movement, the December 2023 headline inflation rate showed an increase of 0.72 percent points when compared to the November 2023 headline inflation rate. On a year-on-year basis, the headline inflation rate was 7.58 percent higher compared to the rate recorded in December 2022, which was 21.34 percent. This shows that the headline inflation rate (year-on-year basis) increased in December 2023 when compared to the same month in the preceding year (December 2022).

Furthermore, analysis of the data reveals that on a month-on-month basis, the headline inflation rate in December 2023 was 2.29 percent, which was 0.20 percent higher than the 2.09 percent recorded in November 2023, indicating that in December 2023, the rate of increase in the average price level is more than the rate of increase in the average price level in November 2023.

It is instructive to note that the CPI measures the average change over time in the prices of goods and services consumed by people for day-to-day living, and according to the NBS, the construction of the CPI combines economic theory, sampling, and other statistical techniques using data from other surveys to produce a weighted measure of average price changes in the Nigerian economy.

Following this, the percentage change in the average CPI for the 12-month ending December 2023 over the average of the CPI for the previous 12-month period was 24.66 percent, representing a 5.81 percent increase compared to 18.85 percent recorded in December 2022.

Urban inflation rate spiked on a year-on-year basis in December 2023, and rose to 31.00 percent. This was 8.98 percent higher compared to the 22.01 percent recorded in December 2022. On a month-on-month basis, the urban inflation rate was 2.42 percent, showing 0.19 percent higher compared to 2.23 percent in November 2023. The corresponding 12-month average for the urban inflation rate was 26.22 percent in December 2023, indicating 6.83 percent points higher compared to the 19.38 percent reported in December 2022.

Rural inflation in December 2023 followed a similar pattern as it rose to 27.10 percent on a year-on-year basis; which was 6.38 percent higher compared to the 20.72 percent recorded in December 2022. On a month-on-month basis, the rural inflation rate was 2.17 percent, up by 0.18 percentage points compared to 1.99 percent recorded in November 2023. The corresponding 12-month average for the rural inflation rate in December 2023 was 23.25 percent. This was 4.91 percent higher compared to the 18.34 percent recorded in December 2022.

Food inflation has remained a dominant challenge in the country, and as widely experienced by many people in Nigeria, the NBS affirmed that the food inflation rate in December 2023 was 33.93 percent on a year-on-year basis, which was 10.18 percent higher compared to the 23.75 percent recorded in December 2022. It attributed the rise in food inflation to increases in basic food items.

“The rise in food inflation on a year-on-year basis was caused by increases in prices of bread and cereals, oil and fat, potatoes, yam and other tubers, fish, meat, fruit, milk, cheese, and eggs,” the NBS reported.

On a month-on-month basis, the food inflation rate in December 2023 was 2.72 percent; this was 0.30 percent higher compared to 2.42 percent recorded in November 2023. Again, the NBS said, “The rise in food inflation on a month-on-month basis was caused by a rise in the rate of increase in the average prices of oil and fat, meat, bread and cereals, potatoes, yam and milk, cheese, and egg.”

The average annual rate of food inflation for the 12 months ending December 2023 over the previous 12-month average was 27.96 percent, which was 7.02 percentage points increase from the 20.94 percent average annual rate of change recorded in December 2022.

CAPE Economic Research and Consulting in its January 2024 newsletter had projected price pressures to remain heightened and above pandemic levels as tightening efforts continue to crystalise. In terms of output, it said, “Nigeria’s Q4 2023 output growth is expected to be lower than Q3 2023 but remain positive at 2.11 percent”. The forecast shows that inflationary pressure in Nigeria heightened in December 2023, with headline inflation rising.

To term inflation, CAPE Economic Research and Consulting anticipates that several “central banks would maintain a hold or tight stance at least for the first half of 2024, albeit at a moderate pace to effectively dampen price pressures, bearing in mind trade-off implications for the fragile output growth and financial system stability. We anticipate a gradual return to a loose stance as the year goes by into 2025. The return to loosening is precipitated on the risk of further rate hikes dampening inflationary pressure, but heightening financial system instability and dragging economies into recession”.

While inflation might have commenced moderation in some economies, the aggressive monetary policy is anticipated to have a significant longer-term impact on debt, financial stability, and capital reversals in countries across the world, especially in emerging economies, it pointed.

The Central Bank of Nigeria (CBN) has often expressed optimism that it is headed in the desired direction in terms of achieving price stability in spite of increase in the headline inflation rate. For instance, it had noted that the low rate of increase in the average price level in October compared to September 2023, was a pointer to the fact that the bank’s monetary policy stance to tighten rates and its money market reforms were yielding the desired effect.

Aggressive monetary tightening using various liquidity mechanisms including removing the cap on the Standing Deposit Facility (SDF) and Open Market Operations had raised Open Buy Back (OBB) rates from less than 1 percent in August to their expected levels around the monetary policy rate today. In spite of the increase in the headline inflation rate, the CBN remained upbeat that it was headed in the desired direction in terms of achieving price stability.

According to the CBN, available statistics showed that the first indication of deceleration in prices was recorded in September and further reforms in the money market, which commenced in October, had accelerated easing in prices as indicated by the substantial drop in month-on-month changes recorded in October 2023. “Moderation in month-on-month changes in prices observed in the headline, food and core components of the consumer basket followed reforms in the money market and relative stability in the FX market,” the apex bank stated.

As the CBN prepares for its first Monetary Policy Committee (MPC) meeting under the tenure of Mr. Olayemi Cardoso as Governor, the financial services sector is watching with keen interest to ascertain if the current 18.75 Monetary Policy Rate (MPR) would be maintained, tightened or loosen, and the attendant impact on inflation.

However, as reported by the NBS, the continuous rise in Nigeria’s inflation rate is mainly fueled by increases in food prices believed to be caused by the festering insecurity in the food producing belts of the country. In this situation, price moderation through adjustments by the monetary authority may bring about the expected outcome. It requires the concerted efforts of both the fiscal and monetary authorities to tame the rising inflation.

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