Debunking Economic Myths: Will low inflation rate crash commodity prices and restore welfare?

By Oluwatobi Ojabello and Wasiu Alli

Over the span of a decade, Nigeria’s inflation rate has undergone a notable transformation, marking a significant journey from 8.05 percent in 2014 to a striking 28.92 percent by 2023. This translates to a staggering percentage increase of approximately 259.26 percent over the course of ten years, reflecting the dynamic nature of the nation’s economic landscape and the challenges it has faced along the way.

In economic discourse, inflation is often portrayed as a necessary evil possessing a dual nature. It acts as a catalyst for spending and investment, breathing life into economic activity. However, when left unchecked, it spirals out of control, decimating purchasing power and destabilising entire economies.

Q: “While inflation control is undoubtedly crucial for economic stability, its impact on welfare is subject to various contextual factors and cannot be reduced to a simple cause-and-effect relationship.”

For decades, a prevailing notion has held sway in economic circles: tame inflation, and welfare will naturally rebound. However, recent revelations cast doubt on this simplistic narrative, exposing the intricate dance between inflation control and socio-economic well-being.

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The assertion that controlling inflation guarantees the restoration of welfare to its original state overlooks the intricate web of factors that influence socio-economic well-being. While inflation control is undoubtedly crucial for economic stability, its impact on welfare is subject to various contextual factors and cannot be reduced to a simple cause-and-effect relationship.

Recent data released by the National Bureau of Statistics (NBS) paints a stark picture of the impact of rising inflation on vulnerable communities. According to the report, both overall inflation and food inflation rates have surged, increasing by 1.5 percent and 2.18 percent, respectively. The inflation rate has spiked from 31.7 percent to 33.2 percent, while food inflation has surged from 37.92 percent to 40.1 percent.

These numbers highlight the harsh reality faced by marginalised populations, who bear the brunt of skyrocketing prices. High inflation rates exacerbate existing inequalities, making basic necessities increasingly unaffordable for those already struggling to make ends meet.

In a recent survey conducted by BusinessDay, a notable trend has emerged: while the prices of imported food items are experiencing a downward trajectory, the cost of domestically produced food remains persistently high. This phenomenon presents a perplexing paradox within the food market landscape.

Despite the concerted efforts of monetary policy aimed at fostering economic stability, the outcomes have proven to be somewhat inadequate in addressing the rampant inflationary pressures. Alarmingly, the inflation rate has surged for the 14th consecutive time, signalling a persistent challenge that policymakers must grapple with.

Regrettably, as the battle to tame inflation wages on, with the lofty goal set by Cardozo, the governor of the Central Bank of Nigeria, to cap inflation at 21.4 percent by the year 2024, a pressing question looms large: even if this ambitious target is achieved, will the welfare of the masses, particularly the vulnerable segments of Nigerian society, be restored to its former state?

The proclamation of curbing inflation to a specific threshold is undoubtedly a commendable objective, promising a semblance of stability in the economic landscape. However, the true measure of success lies not only in reining in inflation but also in ensuring that the benefits of such endeavours trickle down to the most marginalised members of society.

As policymakers navigate the intricacies of monetary policy, it is imperative to recognise that economic indicators alone do not encapsulate the full spectrum of human welfare. Beyond statistics and thresholds lie the lived experiences of millions of Nigerians grappling with the harsh realities of soaring prices and dwindling purchasing power.

Therefore, while the quest to tame inflation is a crucial step towards economic stability, it must be complemented by targeted interventions that address the root causes of socio-economic disparities. Only then can we hope to witness the restoration of welfare to its initial conditions, ensuring a brighter and more equitable future for all Nigerians.

Nigeria’s Gini coefficient, a measure of income distribution within a population, has undergone significant fluctuations over the past decade. Starting at a high of 48 in 2014 and ending at 38.37 in 2023, according to BusinessDay projections, these numbers paint a vivid picture of the country’s socio-economic landscape. The Gini coefficient provides insight into the degree of inequality within a society, with higher values indicating greater disparities in income distribution.

Nigeria’s economy is a captivating tale of complexity, where the undeniable influence of human factors shapes its unique trajectory. At the heart of this narrative lies a concept as intriguing as it is perplexing: the “Cobweb Theory.”

This theory, akin to a spider’s intricate web, suggests that the prices of agricultural output in Nigeria exhibit a pattern where increases never quite return to their original position. It is a phenomenon that has unfolded over time, painting a poignant picture of the Nigerian economic landscape.

Indeed, the stark reality is that even when the economy stabilises, essential commodity prices stubbornly cling to elevated levels, refusing to revert to their initial state. It is a situation that evokes a sense of pathos, underscoring the enduring challenges faced by ordinary Nigerians as they navigate the complexities of daily life.

This narrative serves as a powerful reminder of the resilience and adaptability required to thrive in Nigeria’s economic environment. Ordinary Nigerians confront myriad challenges on a daily basis, each hurdle a testament to their unwavering determination and strength.

It’s a reality that evokes a profound sense of empathy and compassion, recognising the inherent struggles faced by individuals striving to carve out a better life for themselves and their families.

Yet, amidst the adversity, there is a glimmer of hope—a testament to the indomitable spirit of the Nigerian people. It is within the depths of these challenges that seeds of resilience are sown, paving the way for transformative growth and progress.

Alawode Gbenga, an information economist, underscores the critical importance of the Monetary Authority’s role in ensuring that inflation rates remain within manageable thresholds. His insights shed light on a pressing concern: the far-reaching socio-economic implications of allowing inflation to spiral out of control.

Gbenga highlights the plight of vulnerable Nigerians, emphasising that mere inflation control measures are insufficient to shield them from the adverse effects of economic instability.

In his poignant assessment, Gbenga humanises the issue, drawing attention to the real-life impact on individuals and families struggling to make ends meet. He articulates a heartfelt plea for action, urging policymakers to recognise the human face behind the statistics and take decisive measures to safeguard the welfare of the most vulnerable members of society.

Gbenga’s impassioned plea serves as a poignant reminder of the profound responsibility borne by the Monetary Authority and policymakers alike. It is a call to action, echoing the voices of ordinary Nigerians whose livelihoods hang in the balance. In the face of economic uncertainty, Gbenga’s words resonate as a rallying cry for compassion, empathy, and decisive action to protect the most vulnerable among us.

The Gini coefficient, a measure of income distribution, serves as a lens through which to view the fairness of wealth allocation within the population. As the years unfold, we witness fluctuations in this metric, ranging from a high of 48 in 2014 to a projection of 38.37 for 2023, according to BusinessDay. This journey reflects shifts in societal dynamics, with higher values indicating greater disparities in income distribution.

Simultaneously, the inflation rate, representing the rate at which prices rise over time, showcases the ebb and flow of economic stability. Nigeria grappled with inflationary pressures throughout the decade, with rates fluctuating from single digits to double digits. The year 2023 saw a notable spike in inflation, reaching 28.92 percent, underscoring the challenges faced by businesses and consumers alike.

Against this backdrop, the intersection of the Gini coefficient and the inflation rate reveals profound insights into Nigeria’s economic landscape. The correlation between income inequality and rising prices highlights the interconnectedness of socio-economic factors, emphasising the need for holistic policy approaches to address systemic issues.

As Nigeria navigates the complexities of its economic journey, one thing remains abundantly clear: simplistic narratives no longer suffice. Debunking myths surrounding inflation and welfare reveals a stark reality: the need for comprehensive, targeted interventions to address the root causes of socio-economic disparities.

From the soaring inflation rates to the fluctuating Gini coefficient, the challenges are multifaceted. Yet, amidst the complexity, lies an opportunity for transformative change. Only through concerted efforts can Nigeria pave the way for a brighter, more equitable future for all its citizens.

Oluwatobi Ojabello, senior economic analyst at BusinessDay, holds a BSc and an MSc in Economics as well as a PhD (in view) in Economics (Covenant, Ota).

Wasiu Alli is a business and finance journalist at BusinessDay who writes about the economy, business trends, and politics. He holds a BA. Ed. and M. Ed. in English Language and Education.