Nigeria's Inflation Maintains Upward Trend Amidst Structural Rigidities

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Monday, November 16, 2020, / 08:00 PM / by Proshare Research /Header Image Credit: NBS



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The misery index of Nigeria has continued to worsen as headline inflation showed no sign of respite in Q4 2020. Rising inflation has reduced consumer real purchasing power and the real returns on domestic investments.

 

The consumer price index (CPI) increased to 14.23% in October 2020 which was roughly +0.52 percentage points higher than the rate recorded in September 2020 (13.71 percent). The rise in food and headline inflation was, among other factors, triggered by disruptions caused by EndSARS protest in October. The protests led to temporary curfews imposed by a few state governments. The restrictions on movement created logistic problems that subsequently caused a spike in the prices of domestic goods and services.

 

Consistent with earlier predictions of a sampled college of economists there was an increase in the magnitude of change in headline inflation and food inflation by +0.52% and +0.72% respectively in October 2020 (see Chart 1 below).

 

Chart 1: Nigeria's Inflation Rate (%)

Proshare Nigeria Pvt. Ltd.

Source: Proshare Research, NBS

 

According to surveyed analysts there is currently no end in sight to the hike in domestic prices as supply chain constraints and weather-induced disruptions to farmgate products continue to cut back agriculture supply which has been compounded by poor security. Inflation rose from +0.49% in September 2020 to +0.52% in September 2020. The trend is expected to linger into the new year (see Chart 2 below). 

 

 

Chart 2: Magnitude of Increase in Nigeria's Inflation Rate (%)

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Source: Proshare Research, NBS

 

Logistics, Insecurities Bane to Declining Food Inflation

The rise in food inflation could be attributed to logistic constraints which were worsened by security challenges that occurred during the EndSARS protests. Food inflation rose by 17.38% in October 2020 from 16.66% in September 2020. The rise in food inflation could be attributed to the rise in the prices of bread and cereals, potatoes, yam & other tubers, meat, fish, fruits, vegetables, alcoholic and food beverages, and oils & fats (see Chart 3 below).

 

Chart 3: Nigeria's Food Inflation Rate (%)

Proshare Nigeria Pvt. Ltd.

Source: Proshare Research, NBS

 

Food inflation has worsened the living standards of the average Nigerian, as it has led to a reduction in the food security of the average household. Food inflation increased from +0.66% in September 2020 to +0.72% in October 2020.

 

In its latest report in October/November 2020 Cadre Harmonise Analysis, FAO noted that over 9.8 million residents in 16 states of Nigeria and the Federal Capital Territory were suffering from hunger. The report stated that Borno, Adamawa, Yobe, Benue, Gombe, Taraba, Katsina, and Jigawa states were struggling with food insecurity and malnutrition while Kano, Bauchi, Plateau, Kaduna, Kebbi, Sokoto, Niger, and the FCT as other locations in Nigeria where residents suffered hunger. The rising food inflation rate implies that the living conditions of these residents would likely worsen and the quest to meet their basic food needs would be beyond their grips (see Chart 4 below).

 

Chart 4: Magnitude of Increase in Food Inflation Rate (%)

Proshare Nigeria Pvt. Ltd.

Source: Proshare Research, NBS

 

The Hard Sting of Core Inflation

Core inflation stood at 11.14% in October 2020 an increase of +0.56%. Unlike in the previous month when core inflation increased at a decreasing rate, in October, core inflation increased at an increasing rate. The highest increases were recorded in prices of Passenger transport by air, Hospital and Medical Services, Passenger transport by road, Pharmaceutical products, Motor cars, Vehicle spare parts, maintenance and repair of personal transport equipment, Hairdressing salons and personal grooming establishments, Miscellaneous services relating to the dwelling, Paramedical services, and shoes & other footwear (see Chart 5).

 

Chart 5: Nigeria's Core Inflation (%)

Proshare Nigeria Pvt. Ltd.

Source: Proshare Research, NBS


The recent increase in fuel prices to N155.17 per litre from N147.67 per litre by the Petroleum Products Marketing Company (PPMC) could cause a series of chain reactions and compound local inflation worries (see Chart 6).

 

Chart 6: Magnitude of Change in Core Inflation (%)

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Source: Proshare Research, NBS

 

However, the recent announcement by international pharmaceutical company, Pfizer, that its early data shows that its COVID-19 vaccine is more than 90% effective provides temporary relief for the outlook of core inflation in Nigeria. Although it might take some time for the vaccine to arrive in the country, a quick dispensation of the vaccines could help reduce the spread of the virus and lead to a recovery in local and global industrial production which would help reduce pressure on prices of pharmaceutical products, vehicles, vehicle spare parts, maintenance and repair of personal transport equipment, repair of furniture, and paramedical services.

 

A Question of Reforms

The continuous rise in Nigeria's headline and food inflation slits open the structural challenges and infrastructural deficiencies of the local economy. Nigeria's structural challenges have led to rising logistic costs and significant disruptions to local supply chains.

 

Surveyed analysts have observed that addressing these issues is critical to sustainable growth as an increase in money supply or expansionary fiscal policy would only worsen Nigeria's rising inflation rate as both monetary and fiscal policies do not work in environments of weak production linkages, hence the need to increase productivity, reduce inflation rate, and unlock manufacuring bottlenecks.


Going Forward

Domestic inflation rate would likely continue to rise in months ahead as some key issues such as weak domestic infrastructure and logistics difficulties linger. With year-end 2020 festivities fast-approaching prices of goods and services will likely pivot upwards and inflict further pain on a festering sore.




Proshare Nigeria Pvt. Ltd.



 

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Proshare Nigeria Pvt. Ltd.


Proshare Nigeria Pvt. Ltd.

 



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