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Why is Inflation increasing?

Nigeria Economy	2656 VIEWS
Nigeria Economy
2656 VIEWS

Saturday, December 21, 2019 / 03:00PM / Adesola Borokinni, Proshare research/Image Header Credit: NBS

With the year 2019 crawling to an end, consumers and investors alike are worried about the spike in the domestic inflation rate. In a sharp reversal of a 19-month downward pattern, the domestic inflation rate has commenced a steady and sustained rise.

National Bureau of Statistics (NBS) figures show that the consumer price index (CPI), a measure of domestic inflation, increased by 11.85 percent (year-on-year) in November 2019, the highest in the last 19 months. The month-on-month inflation declined to 1.02% from 1.07% in October. NBS data suggests that the urban inflation rate increased by 12.47% (year-on-year) in November 2019 up from the 12.20% recorded in October 2019, while the rural inflation rate increased by 11.30 percent in November 2019 from 11.07 percent in October 2019 (see chart 1 below).

Chart1 Inflation rate Jan.-Dec 2019

Proshare Nigeria Pvt. Ltd.

Source: NBS Statistical Data

The composite food index rose by 14.48% in November 2019 compared to 14.09% in October 2019. The month-on-month food index declined to 1.25% from 1.33% in October. The rise in the food index saw an increase in the prices of bread, cereals, oils and fats, meat, potatoes, yam and other tubers, and fish. Core inflation, which excludes the price of agricultural commodities, stood at 8.99%, up by 0.11% points (see chart 2 below).

Chart 2 Food Price Inflation Rate Jan.- Dec. 2019

Proshare Nigeria Pvt. Ltd.

Source: NBS Statistical Data

Table 1 Selected Food Prices Watch For November 2019 With YoY & MoM % Changes

Source: NBS statistical data

The top five commodities with the highest average price increase month-on-month are; rice, onions, yam tuber, maize and tomato. Rice increased by 12.14%, Onions 11.43%, Yam tubers 13.05%, Maize 7.25%, Tomatoes 7.64% in November.

The pertinent question that comes to the mind of the average Nigerian is; why is inflation rising? A rise in inflation, which signifies a reduction in purchasing power of the average Nigerian citizen, is a further addition to their misery given the already alarming rise in the poverty level, low GDP growth rate and unemployment rate.

Border Trouble

Nigeria's borders with neighbouring countries, the Benin Republic, Niger and Cameroon were shut with the main aim of curbing smuggling of goods and illegal commercial activities. Although the customs comptroller-general claimed that the customs had recorded an upsurge in revenue since the border closure, the question that weighs to the mind of concerned Nigerians are: What is the duration of the border closure? Does the benefit of the border closure outweigh the cost of the border closure? How does the cost and benefit of the border closure affect the Nigerian citizen?

The most visible effect of the border closure on the economy and the average citizen is the recent rise in the inflation rate in Nigeria. The rise in inflation is a major cost of the border closure for which the average Nigerian citizen must pay. The current rise in the inflation rate is not unconnected with the border closure. The inflation rate, which was 11.2% as at the time of enforcing the initial partial border closure, has risen to 11.85% in November since the Nigeria border has been fully shut. A large proportion of the goods consumed by the Nigerian populace such as rice, oil, tomatoes, poultry, and sugar, enters through its porous land borders. Hence, the temporary closure has led to an increase in the average prices of a few available goods in the economy.

The speculations of a further rise in the inflation rate, coupled with the Christmas festivity period getting closer has caused the inflation rate to rise further. The end of the year usually marks festivity in Nigeria. The average Nigerian wants to maximize the festive period by visiting home, buying food and household commodities, wares etc. As a result, the festivity mood causes a spike in the prices of goods and services, as traders and businesses see the upsurge in demand, which is attributable to the festive period as an opportunity to maximize their profits.

A Look Ahead

Given the recent trends in economic activities, analysts expect that there will be a further inflation rise in December 2019. There are expectations that there will be a further rise in the prices of commodities and transportation. A low purchasing power caused by a rising trend in the inflation rate means there will likely be a slowdown in consumption activities as well as sales activities in December. Transporters are most likely to increase prices to take advantage of the festivities.

Although, the CBN governor said that the rising trend in inflation was temporary, as the government was pumping in funds to bridge the supply gap. Economic experts have expressed their pessimism on the effectiveness of the funds allocated in boosting local production. They noted that the country lacks sufficient reliable statistical data on the local commodities produced in Nigeria. Hence, making it difficult to measure the success or outcome of funds given to boost local production.