Trauma is becoming part of Nigeria's day-to-day existence and in no greater place is this rearing up than in the sustained rise in the country's domestic inflation rate. Nigeria's upward aggregate price trajectory has left consumers worried, investors scared and farmers confused as food prices escalate without a commensurate rise in farmgate incomes.
Nigeria's inflation rate stood at 17.33% in February 2021 as a result of persistent insecurity caused by rising kidnappings and conflicts between farmers and cattle herders, upward foreign exchange adjustments, ports congestion, and covid-19-induced supply chain disruptions.
As predicted by local analysts all sub-indexes of the inflation rate rose in February 2021. Nigeria's food inflation jumped from 20.57% in January 2021 to 21.79% in February 2021. The highest increases were recorded in the prices of bread and cereals, potatoes, yam, and other tubers, meat, food products, fruits, vegetables, fish and oils, and fat.
Also, core inflation rose to 12.38% in February 2021 from 11.85% the previous month. The highest increases were recorded in pharmaceutical products, paramedical services, repair of furniture, vehicle spare parts, maintenance & repair of personal transport equipment, motor cars, dental services, hairdressing salons, personal grooming establishment, passenger transport by air, medical services, miscellaneous services relating to the dwelling, hospital services, passenger by transport by road (see Chart 1).
Chart 1: Nigeria's Inflation Rate
Source: NBS, Proshare
No Respite in Sight for Households
The recent inflation and unemployment figures released by the National Bureau of Statistics (NBS) peeled open the level of misery faced by households. The increase in inflation rate suggests that the household's disposable income has dipped a few notches as most food and core inflation items that recorded increases were essential items consumed by ordinary citizens. Furthermore, the rise in the recent unemployment rate showed that there was a constraint in new opportunities available to people especially youths who recorded the highest levels of unemployment in Q4 2020. Youth unemployment was highest for persons in the labour force between the ages of 15-24 with 53.4% and 25-34 with 37.0%.
Recent trends suggest that Nigeria's inflation rate would likely maintain its upward trend in 2021. Analysts expect that the domestic oil sector would be fully deregulated between 2021 and 2020 resulting in higher retail price uncertainty for white fuel. Hence, an increase in the international oil price would mean an increase in the domestic price of PMS which could fuel a rise in the inflation rate. Furthermore, the continuous rise in insecurity, for example, the recent spate of kidnappings has hampered the cultivation and harvest of agricultural produce which suggests that there might be a continuous rise in food prices and essential commodities in 2021.
Policies aimed at reducing the inflation rate and bolstering economic growth have been frustrated as they are yet to yield any positive results suggesting that the momentum in the inflation rate would linger. For example, despite the implementation of the electronic call-up system, there are reports of congestion at the port which was attributed to activities of the construction work by HITECH, activities of the terminal company APMT, and lack of coordination on the part of the Nigerian Port Authority (NPA) and officials of the Nigerian Union of Petroleum and Natural Gas Workers on the operation of the e-call-up system.
Nigeria's FX challenge has also fuelled the increase in the inflation rate. To increase the supply of FX, the CBN implemented the "Naira 4-dollar scheme" which some analysts have projected cannot solve Nigeria's fundamental issues that continuously fuel its FX scarcity.
These are certainly hard times for households who are projected to record a further decline in their real income as inflation rises. Hence, government policies should be tilted towards cushioning the effect of the inflation rate on the household's income.
Between a Rock and a Hard Place
The simultaneous rise in inflation and unemployment rate puts the monetary policy committee in a tough grind as they need to choose between an anti-inflationary stance and a pro-growth agenda. Given the slow growth of the GDP by +0.11% in Q4 2020, it has been projected that the CBN would tilt towards a pro-growth outlook.
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