Explainer: How inflation robbed Nigerians in 2022

With a few days to the first anniversary of Russia’s invasion of Ukraine, the fallout of the war is hitting Nigerians hard.

In Nigeria, where more than half of the population of 200 million lives on less than $2 a day, every little price increase puts a significant strain on household incomes. At least 133 million people suffer from “multi-dimensional poverty”, according to the National Bureau of Statistics (NBS), which says citizens spend about half of their income on food and another 20 percent on transportation.

The strain became even more evident during the holiday season as families capped their expenses, including traditional travel to spend time with extended families.

Food inflation, which accounts for more than 50 percent of the inflation rate, rose to 24.13 percent in November 2022, the highest in 17 years, from 21.09 percent in the previous month.

Olaolu Boboye, a senior analyst at CardinalStone Partners, said: “Inflation eroded the purchasing power of money for wage earners and small businesses in 2022, thereby intensifying the poverty situation in the country.”

The inflation rate, according to NBS, quickened further to 21.47 percent in November, compared to 21.09 percent in October.

The NBS noted that the factors responsible for the increase in the annual inflation rate on a year-on-year basis could be attributed to the increasing cost of importation due to the persistent currency depreciation and the general increase in the cost of production e.g increase in energy cost.

The rise in the food index was caused by increases in the prices of bread and cereals, food products, potatoes, yams, and other tubers, wine, fish, meat, and oils, the report stated.

According to Boboye, companies and investors were also victims of the spiraling inflation. “With inflation rising, the monetary authorities decided to hike the interest rate, which had a dampening effect on the equities market.”

“When there is a hike in interest rate, the cost of borrowing goes up for companies that come to the market to borrow for investment, and companies that are relatively highly leveraged have to pay more. They had to move to the fixed income market, and yield in the fixed income market was low, even though it has risen now to a considerable level,” Boboye said.

As the ripple effect of the soaring inflation continues, speculations and analysis concerning the persistent increase have been a conversation on the lips of many Nigerians, and BusinessDay explains some of the reasons for the persistent rise in Nigeria’s inflation.

Supply shocks to energy

According to the Harvard Business Review, inflation often happens because of supply shocks and major disruptions to an important economic input, like energy. For example, if a lot of oil fields stop producing oil because of a war, the price of energy increases. Since energy is a critical input into almost every other good, prices of other things rise, too. This is often called “cost-push inflation.”

In Nigeria’s case, the Russian invasion of Ukraine significantly shook up the world’s energy supply chain as both are major commodity exporters, and Nigeria, an oil-producing country, has been unable to take advantage of the resulting higher oil prices.

With energy prices reaching record highs, the price of lots of goods rose unexpectedly due to increased shipping fees, and those increases then rippled through the economy.

Supply chain disruptions

Supply chain disruptions in the global market due to the Russia-Ukraine war have caused food prices to rise.

Ukraine and Russia are large exporters of agricultural commodities, particularly grains and sunflower oil, and the crisis in the region has pushed all vegetable oil prices and grains significantly higher, thereby worsening the food crisis and impacting net importers like Nigeria.

According to the Food and Agriculture Organization of the United Nations, global food commodity prices in March 2022 averaged 159.3 points, up 12.6 percent from February, making it the highest level since 1990.

Money supply

According to HBR, an increase in the money supply will tend to cause inflation. “The money supply theory of inflation was popularised by economist Milton Friedman who famously said that ‘always and everywhere is a monetary phenomenon.’ While it’s true that increases in the money supply can cause inflation, Friedman’s claim was too strong. In fact, if you had to boil the causes of inflation down to one thing, it might be expectations.”

However, David Moss of Harvard Business Review Press explained in a book that “with more cash in their pockets and bank accounts, consumers often find new reasons to buy things, but unless the supply of goods and services has increased. In the meantime, the consumers’ mounting demand for products will simply bid up prices, thus stoking inflation. Economists sometimes say that inflation rises when ‘too much money is chasing too few goods, and this is sometimes referred to as demand-pull inflation.”

“A national government could print and distribute all the money it wanted, turning all of its residents into millionaires. But collectively they would be no better off than before unless national output increased as well. And even with all that money, they would find themselves worse off if national output declined,” Moss said.

In Nigeria’s case, with government spending increasing, more money goes into circulation in an economy, thereby leading to an increase in consumer spending, but with no increase in the production of goods and services, inflation continues to rise.

What the government is doing to curb inflation

According to the HBR, central banks use interest rates to control demand and inflation. “If inflation is high, they raise their target for short-term interest rates. Higher interest rates make borrowing costs less attractive for firms and consumers, which leads to less demand for goods and investments. Since inflation is caused by demand outstripping supply, lowering demand to bring it in line with supply relieves the pressures that were raising prices,” it stated.

In a bid to tackle inflation in the country, the Central Bank of Nigeria increased its benchmark interest rate by a total of 500 basis points to 16.50 percent last year.

However, the disinflationary impact of these measures has been weakened by continuing monetisation of the fiscal deficit, sector-specific subsidised credit provisions, and imported food and energy cost increases.

When will inflation go down?

Boboye said: “For Nigeria, what has been driving inflation is the combination of energy prices, currency pressures as well as a bit of pressure from the agricultural sector like flooding in 2022, insecurity, and supply chain disruption, which led to record high inflation.”

However, he expects that “in the second half of this year, both locally and globally, the base effect support will be a downward trend; and for Nigeria, it is more of a base effect that will make inflation wane because there are still some pressure points we are expecting for the first half of the year and the supply chain disruptions we saw are already waning which should have an impact on inflation.”