How Replacement Cost Pricing is Hurting Nigerians, Economy

Raheem Akingbolu

A member, Competition and Consumer Protection Tribunal, Sola Salako-Ajulo, has described the current price gouging rampaging various markets in Nigeria, as economic reality that affects every sector.

 In a statement titled, “Price Hikes or Price Gouging?” a copy of which was made available to THISDAY, Salako-Ajulo, who is also a leading advocate for consumer protection and ethical business practices, agreed that the removal of subsidies on petroleum products, combined with volatile exchange rates, has led to a significant surge in the cost of living.

While pointing out that the impact of inflation has been particularly severe in recent months, she made reference to the fact that sharp increments in the price of food items and transportation have placed immense pressure on consumers.

She said: “One of the most immediate consequences of the current inflationary pressures is the dramatic increase in the cost of essential goods, particularly food. For example, the price of a 50kg bag of rice, which was around N35,000 before the subsidy removal, has now surged to over N86,000 in many parts of the country, a clear 100 per cent increase. Similarly, a loaf of bread that previously cost N500 now costs N1,600 or more, depending on the location. That is an over 200 per cent increase. Utilities like electricity have also seen about 200 per cent increase in prices under a confusing band service matrix. Nigerian consumers are seeing between 100-500 per cent price rise in cost of living, which has almost wiped out the middle class and is daily increasing the number of people now living in poverty. Food inflation is hovering around 30 per cent while wage increases are not catching up with the galloping inflation.”

Though the consumer advocate admitted that the subsidy removal and exchange rates volatility could account for the adjustment in cost of living, she pointed out that the speed of impact and the angle of inflation Nigerians are experiencing appear to exceed the average rate expected from such economic adjustments.

She further said: “These price hikes are not merely reflective of increased production costs, they are also the result of many businesses preemptively adjusting prices to cover the anticipated higher costs of replenishing their stock, a practice known as replacement cost pricing.

“This approach, which may seem like a protective measure for businesses, has far-reaching and often detrimental effects on the economy. By increasing prices to reflect replacement costs, businesses inadvertently distort the market, leading to sudden and sharp increases in the cost of living. This has created an incongruence situation between the percentage increase in fuel prices and the overall inflation rate.

“It also directly affects the speed at which inflation appears in the market, which normally should be measured in months but which we are measuring in minutes, leaving the consumer with zero time to plan for adjustments to inflation. Replacement Cost Pricing (RCP) effectively shifts the full burden of inflation on consumers, forcing them to bear the cost of future economic uncertainties.”

The federal commissioner opined that replacement cost pricing may appear as a necessary business strategy, but she was quick to add that it often opens the door to price gouging—an exploitative practice where prices are inflated to levels far beyond what is necessary to cover costs and account for reasonable profit.

“Price gouging typically occurs during emergencies or periods of economic instability, such as the current inflationary period in Nigeria. It is particularly prevalent in essential goods like food, medicine, and fuel, where consumers have little choice but to pay exorbitant prices to meet their basic needs,” she explained.

Speaking further, the expert stated that the effects of price gouging are profoundly damaging to the economy and society, especially considering its ability to erode consumer trust.

“When consumers perceive that businesses are taking advantage of them during challenging times, it undermines the relationship between buyers and sellers. Trust is a cornerstone of a healthy market, and when it is lost, consumers may begin to withhold spending, seek out black markets, or engage in other behaviors that further destabilise the economy,” she added.