In this post we will be looking at meaning of Inflation and types, Nigeria’s inflation rate, effects and determinants of Persistent Inflation in Nigeria.
INTRODUCTION
Nigeria is often referred to as the Giant of Africa, it is the 7th largest populated country in the world with about 167 million people; one out of every 4 persons in West Africa is a Nigerian and Nigeria is the largest country entirely of Negroes. Apart from its abundance of human resources, the country is blessed with large arable lands and mineral resources. These resource include, coal, tin ore, crude oil and gas among others. But it is an underdeveloped economy characterized by high unemployment rate, inflation, poverty, low-capacity utilization among many other such factors.
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At the macroeconomic level, an upward inflationary pressure may make the export of goods and services in an economy to dwindle because the prices of tradables may become less competitive in the international markets hereby discouraging foreign purchases and consumption of such tradables. An offshoot of this is that the national income of the economy may fall with attendant adverse consequences on the economy’s employment economic growth and possibly development. Plausibly, it is for these reasons that managers of economies around the world strive strenuously to keep inflation rates at low and stable levels. The managers of the Nigerian economy are not without the fervour to have a low and stable inflation environment.
But a retrospective look at the performance of the economy, for example, from 1974 which was the year the country’s monetary policy regime changed from exchange rate targeting to the direct monetary targeting framework in response to the inflationary pressure resulting from increased public expenditure as a result of the reconstruction works after the civil war. and the monetisation of the petrodollars, to 2013 shows that the Nigerian economic environment may be anything but a low and stable inflation one. During this 40-year observation period, for instance, the average annual rate of headline inflation (inflation rate estimates based on the price movements of all essential commodities including food and energy) was a double-digit rate of 20. 47 percent (CBN, 2008; CBN, 2010; CBN, 2011 and CBN, 2013).
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WHAT IS INFLATION?
Inflation is a rise in prices, which can be translated as the decline of purchasing power over time. The rate at which purchasing power drops can be reflected in the average price increase of a basket of selected goods and services over some period of time. The rise in prices, which is often expressed as a percentage, means that a unit of currency effectively buys less than it did in prior periods. Inflation can be contrasted with deflation, which occurs when prices decline and purchasing power increases. While it is easy to measure the price changes of individual products over time, human needs extend beyond just one or two products.
Individuals need a big and diversified set of products as well as a host of services for living a comfortable life. They include commodities like food grains, metal, fuel, utilities like electricity and transportation, and services like healthcare, entertainment, and labor. Inflation aims to measure the overall impact of price changes for a diversified set of products and services. It allows for a single value representation of the increase in the price level of goods and services in an economy over a period of time.
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TYPES OF INFLATION
There are three primary types of inflation:
- Demand-pull inflation: Demand-pull inflation describes how demand for goods and services can drive up their prices. If something is in short supply, you can generally get people to pay more for it.
- Cost-push inflation: Cost-push inflation often kicks in when demand-pull inflation is going strong. When raw materials costs increase for businesses, the businesses in turn must raise their prices, regardless of demand.
- Built-in inflation: As demand-pull inflation and cost-push inflation occur; employees may start asking employers for a raise. If employers don’t keep their wages competitive, they could end up with a labor shortage.
NIGERIA’S INFLATION RATES
The consumer price index (CPI), which measures the rate of change in prices of goods and services, rose to 22.04 percent in March 2023, up from 21.91 percent in the previous month. The inflation rate data is contained in the latest CPI report released on Saturday by the National Bureau of Statistics (NBS). The March increase comes across as the third consecutive surge in the country’s inflation figure since the year began. According to the NBS report, “the March 2023 inflation rate showed an increase of 0.13 percent points when compared to February 2023 headline inflation rate”. “On a year-on-year basis, the headline inflation rate was 6.13 percent points higher compared to the rate recorded in March 2022 which was 15.92 percent,” the data bureau said.
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This shows that the headline inflation rate (year-on-year basis) increased in March 2023 when compared to the same month in the preceding year (March 2022). “However, on a month-on-month basis, the all-items index in March 2023 was 1.86 percent, which was 0.15 percent points higher than the rate recorded in February 2023 (1.71 percent),” NBS said. According to the report, this means that in March 2023, on average, the general price level was 0.15 percent higher relative to February 2023. NBS also said items like food and non-alcoholic beverages contributed largely on the divisional level to the increase in the headline.
“The contributions of items on the divisional level to the increase in the headline index are food and non-alcoholic beverages (11.42 percent); housing, water, electricity, gas, and other fuel (3.69 percent),” the agency said. “Clothing and footwear (1.69 percent); transport (1.43 percent); furnishings, household equipment and maintenance (1.11 percent); education (0.87 percent); health (0.66 percent); miscellaneous goods and services (0.37 percent); restaurant and hotels (0.27 percent); alcoholic beverage, tobacco and kola (0.24 percent); recreation and culture (0.15 percent) and communication (0.15 percent).”
Food inflation surges to 24.45 percent
Meanwhile, the NBS said food inflation in March 2023 to rose to 24.45 percent on a year-on-year basis, representing a 7.25 percent points higher compared to the rate recorded in March 2022. The statistics body explained that the rise was caused by increases in prices of oil and fat, bread and cere on a state profile, Sokoto, Zamfara, and Plateau residents paid less for food in the period under review, the agency noted.“In March 2023, food inflation on a year-on-year basis was highest in Kwara (28.84 percent), Ondo (28.22 percent), and Lagos (27.92 percent),”the report further reads.als, potatoes, yam and other tubers, fish, fruits, meat, vegetables, and spirits. Sokoto (18.99 percent), Zamfara (20.57 percent) and Plateau (21.38 percent) recorded the slowest rise in food inflation on a year-on-year basis. “On a month-on-month basis, March 2023 food inflation was highest in Bayelsa (3.11 percent), Rivers (3.00 percent), and Ondo (2.98 percent), while Bauchi (1.03 percent), Zamfara (1.08 percent), and Ogun (1.13 percent) recorded the slowest rise in food inflation.”
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Controlling spending not best strategy for moderating inflation’
The economists were reacting to recent policies (interest rate hike, and the naira redesign policy) by the country’s central bank aimed at curbing the current inflationary trend in Nigeria. According to Kale, following the CBN’s naira redesign policy, currency in circulation has dropped from N3.28 trillion in December 2022 to N1.38 trillion in January and to an estimated N982.09 billion in February 2023, representing a 235 percent decline.
“It was expected that the scarcity of redesigned notes, which caused a cash crunch in the economy since January 2023, would stimulate a slowdown in demand-pull inflation, especially given the series of interest rate hikes from the central bank (500 basis points since May 2022). This has, however, not happened yet,” he said. “This might indicate a drop in output below effective demand, despite the cash crunch, with some producers of goods and services whose activities are cash-based facing challenges purchasing inputs for production or replacing their stock and distributing them across the country.”
EFFECTS AND DETERMINANTS OF PERSISTENT INFLATION IN NIGERIA
In spite of these challenges, the Central Bank of Nigeria in recent times have consistently churned out harsh policies that the bank claims are aimed at cushioning inflation in Nigeria. For instance, on Tuesday, 25th January 2011, the Central Bank increased the Monetary Policy Rate (MPR) by 25 basis points from 6.25 to 6.5 percent to reduce money supply in the economy. Between January 2011 to January 2013, the MPR has been increased to 12.5 percent.
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These increases impact on the prime lending rates of banks, thus affect cost of borrowing and ultimately the cost of production of goods or services in the country. This in turn is likely to impact on total investments output, employment and development. Inflation poses serious challenge especially in developing countries including Nigeria. Inflation increases the cost of goods, deepens poverty and makes life difficult for the poor. Inflation in Nigeria keeps soaring in spite of unemployment, the relative movement of inflation and interest rates in Nigeria between 1980 and 2010. The specific effects of inflation in Nigeria include:
- Planning Problems
- Project Execution
- Discourage Savings
- Inequality
- Pensioners and Fixed Income Earners
Determinants Of Inflation in Nigeria
Notwithstanding, the general theories that explain inflation worldwide, the survey identified these specific sources of inflation in Nigeria. The sources include:
- Corruption
- Incidence of multiple taxation
- Productivity constraints
- Poor work ethics
- inadequate social infrastructure
- Deficit financing by Government
- Unplanned wage increases
- Inadequate storage facilities
- Import dependence
- Weak Distribution Mechanism
- High cost of borrowing
- Extra economic factors