Nigeria's Inflation Rises to 13.71% as Concerns Mounts Up

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Monday, October 19, 2020, / 03:00 PM / by Proshare Research / Header Image Credit: NBS

 

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As predicted by economic experts, Nigeria's inflation rate continued its upward trend increasing by +0.49% from 13.22% in August 2020 to 13.71% in September 2020 (see Chart 1).

 

Nigeria's upward trending inflation rate, according to analysts, poses a major challenge for the central bank of Nigeria (CBN). The consistent rise in inflation which was initially attributed to the temporary closure of the Nigerian border in August 2019 has been worsened by the COVID-19 pandemic.

 

Chart 1: Nigeria's Inflation Rate (%)

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Source: Proshare Research, NBS

 

Apart from the rise in the rate of inflation, what draws the attention of experts is the magnitude of the rate of increase which is very worrisome. The magnitude of the rise in the inflation rate rose by as much as +0.4% in August 2020 to +0.49% in September 2020. The magnitude of the increase has been on the rise since May 2020 and this rise is expected to continue till the end of the year (see Chart 2).

 

 

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

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Source: Proshare Research, NBS

 

Food inflation rose to 16.66% in September 2020 from 16% in August 2020. The rise in the food index was caused by increases in prices of bread and cereals, potatoes, yam, and other tubers, meat, fish, fruits, and oils & fats (see Chart 3).

 

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

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Source: Proshare Research, NBS

 

In a chase with headline inflation, the magnitude of the rise in food inflation has been equally worrisome. Food inflation rose from +0.01% in May 2020 to +0.66% in September 2020, food inflation has risen at a faster pace. The persistence in security worries, the approaching end-of-the-year festivities, rising incidences of floods in parts of the country, and the continuous spread of the coronavirus has disrupted global supply chains, thereby posing challenges for food prices. Given these prevailing circumstances, it's been predicted that the food inflation rate will continue to rise (see Chart 4).

 

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

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Source: Proshare Research, NBS


Nevertheless, core inflation stood at 10.58% in September 2020 an increase of +0.06%. Unlike headline inflation and food inflation that have increased at increasing rates, the country's core inflation rate has increased at a decreasing rate. The highest increases were recorded in the prices of passenger transport by air, medical services, hospital services, pharmaceutical products, passenger transport by road, motor cars, vehicle spare parts, maintenance and repair of personal transport equipment, repair of furniture, and paramedical services (see Chart 5).

 

Chart 5:  Nigeria's Core Inflation (%)


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Source: Proshare Research, NBS


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The prices of transport by road might not taper down anytime soon given the total deregulation of the oil sector. The burden of the increase in fuel price resulting from the deregulation of the oil sector would be transferred to the end consumer in the form of higher transportation costs. On the other hand, there might be a reduction in the prices of pharmaceutical products, passenger transport by road, motor cars, vehicle spare parts, maintenance and repair of personal transport equipment, repair of furniture, and paramedical services if the spread of the virus reduces significantly both domestically and globally.

 

A reduction in the local spread of the virus would reduce the pressure on the demand for pharmaceutical products, and paramedical services which supply has been constrained due to the disruption in their supply chains as India which is one of the largest exporters of pharmaceutical products have recorded a significant daily increase in the number of coronavirus cases.  Furthermore, a reduction in the global spread of the virus will mean a quick rebound in trading activities and a reduction in the cost of importing vehicle parts, and an increase in the availability of vehicle parts. While if the spread of the virus continues in countries specialized in automobile production the price increase will most likely continue (see Chart 6).

 

 

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

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Source: Proshare Research, NBS


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Getting Past Food Inflation

A major driver of Nigeria's headline inflation has been the consistent rise in food inflation. The rise in food inflation has been partly attributed to Nigeria's poor seed yields, border closure, poor storages, insecurities, and flooding in some parts of the country. To prevent the further rise in food prices, these problems need to be addressed urgently. Furthermore, the use of best technology practices and a guarantee of security by security agencies would also bolster farmer's confidence to return to the farms.

 

Also, farmers can either adopt floodplain agriculture, spate irrigation, inundation canals, and depression agriculture to cope with the adverse effects of flooding. To ensure greater efficiency and productivity in agricultural outputs, yield mapping could also be adopted. Georeferenced data on crop yield and characteristics, such as moisture content could be adopted i.e. range sensors could be adopted for mapping crop yields.


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Risk of an Heightened Inflation

CBN noted that the rise in the inflation rate could be attributed to structural factors rather than a monetary phenomenon, hence, the reduction in its monetary policy rate by 100 basis points from 12.5% to 11.5%.  Although the policy intends to increase the flow of credit to the real sector of the economy, there are limits to the effectiveness of this policy. For example, improvement in manufacturing activities is hinged on adequate infrastructural facilities, availability of forex for importing raw materials, and the quick rebound from the adverse effect of COVID-19 on global trade, therefore, increased credit to the manufacturing sector without adequately addressing these core issues will further heighten inflation rate. Furthermore, an improvement in the agricultural output depends on the improvement in seed yields, proper technology to deal with flooding, security, etc. Therefore, if these triggers for food inflation and core inflation are not adequately addressed through fiscal policy, CBN's reduction in MPR to 11.5% might further exacerbate Nigeria's rising inflation rate.


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Going Forward

Nigeria's headline inflation would likely maintain its upward trajectory until the end of the year this is so because of the fast-approaching year-end festivities as well as the continuous spread of the virus which may disrupt global supply chains.

 

There are expectations that the rising inflation rate would be the focal point of discussion for the next monetary policy committee meeting of the CBN given the continuous reduction in the real purchasing power of the local currency.

 

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 Proshare Nigeria Pvt. Ltd.


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