Despite Moderation, Inflation Still Potent Threat to Economy

James Emejo writes that inflation may have lost steam last month but remains a challenge to economic growth

Following 10 months of consecutive uptick, the headline inflation rate slightly moderated in December to the excitement of monetary authorities – though it remains a far cry from the Central Bank of Nigeria (CBN)’s revised target of between 7 to 10 per cent.

Apart from the food and core component of inflation that had been key sources of concern in recent times, imported inflation, which stemmed largely from the global distortion in the commodity supply chain caused by the war in Ukraine further compounded the rising prices.

Rising prices

According to the National Bureau of Statistics (NBS), Consumer Price Index (CPI) which measures the rate of change in prices of goods and commodities increased by 5.72 per cent to 21.34 per cent year on year in December 2022 compared to 15.63 per cent in December 2021.

However, inflation, year on year declined marginally by 0.61 per cent in December compared 21.47 per cent in November.

Month on month, headline inflation, however, increased to 1.71 per cent December from 1.39 per cent in the preceding month due to a rise in consumer spending during the festive period.

Food inflation rose to 23.75 per cent year-on-year which was 6.38 per cent higher compared to 17.37 per cent recorded in December 2021.

On a month-on-month, the food inflation stood at 1.89 per cent, which was 0.49 per cent higher than the 1.40 per cent in November.

The rise in food inflation was attributed to increases in prices of bread and cereals, oil and fat, potatoes, yam, and other tubers, fish, and food products.

The core index, which excludes the prices of volatile agricultural produce stood at 18.49 per cent year on year in December, up by 4.62 per cent when compared to the 13.87 per cent recorded in 2021.

Month-on-month, core inflation stood at 1.33 per cent in December compared to 1.67 per cent in the preceding month.

Core inflation resulted from increases in prices of gas, liquid fuel, passenger transport by air, vehicle spare parts, fuels and lubricants for personal transport equipment, and solid fuel among others.

On year-on-year, urban inflation increased to 22.01 per cent, compared to 16.17 per cent in 2021 while the index rose to 1.80 per cent month on month in December from 1.50 per cent in November.

Rural inflation stood at 20.72 per cent year-on-year, higher than 15.11 per cent in December 2021 while month-on-month, the index rose to 1.63 per cent from 1.30 per cent.

At the states level, all items inflation on yearly basis was highest in Bauchi (23.79 per cent), Kogi (23.35 per cent), Anambra (23.13 per cent), while Taraba (18.98 per cent), Osun (19.09 per cent) and Kwara (19.18 per cent) recorded the slowest rise in the headline index.

Month-on-month basis, however, inflation was highest in Oyo (3.48 per cent), Abuja (3.05 per cent), Sokoto (2.58per cent), while Ebonyi (0.11 per cent), Ekiti (0.68 per cent) and Nasarawa (0.70 per cent) recorded the slowest rise.

Also, year on year, food inflation was highest in Kwara (27.90 per cent), Imo (26.94 per cent) and Ebonyi (26.28 per cent), while Sokoto (20.90 per cent), Taraba (21.59 per cent) and Cross River (21.71 per cent) recorded the slowest rise in the index.

 On a month-on-month basis, however, food inflation was highest in Sokoto (3.38 per cent), Oyo (3.10 per cent) and Kaduna (2.97 per cent), while Nasarawa (0.06 per cent), Osun (0.70 per cent) and Kogi (0.76 per cent) recorded the slowest rise.

Impact of headline inflation

Without a doubt, inflation remains the biggest challenge for monetary policy effectiveness and it becomes difficult to stabilise prices as it devalues the currency amidst inflationary pressures.

The rate of inflation often decided the direction of monetary policy on whether to hold, raise or lower Monetary Policy Rate (MPR) otherwise known as the benchmark interest rate which determines the cost of funds in the economy.

There is a direct correlation between the high cost of borrowing and inflation as well as the prices of goods and commodities.

This is why inflation remains an enemy of the common man as it wipes off the value of the little earnings they make and makes it difficult for policymakers to achieve their targets.

Commodity prices have more than doubled in recent times because of inflation, a situation that had further plunged more people into poverty in the last few years.

The CBN MPC recently had to raise the MPR by 100 basis points to 17.5 per cent despite inflation easing on a month-on-month basis in December.

While the MPC at its recent meeting welcomed the moderation in inflation following 10 consecutive months of uptick had slowed, it remained a threat to monetary policy and therefore, the bank had to further raise the interest rate.

Not yet uhuru

CBN Governor, Mr. Godwin Emefiele had pointed out that the decision of the bank to further tighten monetary policy was borne out of the need to address current inflationary concerns adding that the marginal drop in the headline index in December was not enough to loosen the monetary stance for now.

According to him, “We are happy that some of the policies we’ve introduced in the last couple of months in our attempts to rein in inflation are beginning to yield results, not just about platooning but beginning to drop.

“But MPC members feel that a 10-basis point drop from 21.47 per cent to 21.34 per cent is not just good enough as a reason to begin to celebrate. That is year on year. But on the basis of month-on-month CPI, we still found out that inflation was still going on both the headline and all that. On year-on-year basis, we saw food coming down but at the same time, we still saw core inflation moving up.”

Emefiele said, “For us, it is not time to celebrate yet…This is not enough sign to loosen but be aggressive.

“With inflation at 21.34 per cent, it is already hurting growth and it’s moderating the level of output we would have seen if inflation was within our own target range of between 7 and 10 per cent.

“And that at 21.34 per cent, there was no way we were going to celebrate but it is good for us to begin to taper and the rest.”

From the foregoing, it is clear that the coast is not clear yet for easing MPR as small businesses continue to endure the high cost of credit from commercial banks while they pass the burden to poor consumers.

Analysts react

Speaking in separate interviews with THISDAY on the impact of inflation on the economy, analysts gave interpretations about the slight drop in inflation and the way forward for the economy.

Wealth Management and Business Development Consultant, Mr. Ibrahim Shelleng, said “inflation figures must be put in context. What it is showing is that the rate at which inflation is rising has slowed down, but this does not mean that high prices have reduced.

“For example, a car accelerating at 100mph that reduces to 95mph is still traveling at high speed! The slight drop in figures could be attributed to the relative stability in the FX market which has maintained a range between 730 to 750 for a number of months.”

He said, “Traditionally, a slight decrease in consumption tends to happen in January. The CBN’s policies have had some impact as well in reducing the availability of liquidity, which has often been channeled to the FX market and distorted the parallel market rates. The structural issues the country faces still exist and continue to affect prices.”

Also, Managing Director/Chief Executive, Dignity Finance and Investment Limited, Dr. Chijioke Ekechukwu, it is not time to celebrate the drop in the headline index adding that the factors which often led to inflation are still much around.

The former Director General, Abuja Chamber of Commerce and Industry (ACCI) said, “It is not yet Uhuru for inflation rate in Nigeria. The reduction in December inflation rate was an increase month on month compared to the November position. The situations that have increased the rate in the past are still with us.

“The Russian/ Ukrainian war which has distorted the supply of Agricultural grains and Petroleum products still persists.

Insecurity still continues to affect supply adversely and resultant price hikes.”

Ekechukwu said, “Exchange rate hasn’t improved and therefore will continue to keep the inflation rate high.

So, the marginal reduction in December rate was just a mere flash.”

On his part, Managing Director/Chief Executive, SD&D Capital Management Limited, Mr. Idakolo Gbolade, pointed out that the marginal drop in inflation could be a result of many factors including but not limited to stability in exchange rate occasioned by the excess liquidity being mopped up by CBN.

He also attributed the decline to increased production in the oil sector which has given rise to the receipt of more inflows from crude sales as well as improved performance of the non-oil sector. 

He said, “The increased tax collection by FIRS could also have added to the marginal drop. However, the fundamentals causing inflation have not abated because the exchange rate is still very high, the interest rate has increased the cost of production and cost of doing business, the energy sector is not helping industries, and insecurity and logistics problems have given rise to food inflation trajectory. 

“The government needs to effectively use fiscal and monetary policy tools to tame these factors if we are to see a continuous drop in inflation.”