• Friday, March 29, 2024
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BusinessDay

Taming inflation to stop pressure on household income

food inflation

As many households in Nigeria groan under the weight of inflation, the Federal Government should do well to tame the prowling monster and put measures in place to stop its pressure on their income.

Nigeria is currently in a situation where basic necessities needed for the survival of the common man are increasingly becoming less affordable, putting the country into real crisis. This situation, as it is, defines the country at the moment.

The general increase in prices of goods and services without corresponding increase in income levels, which economists call inflation, is worsening the already precarious state of the Nigerian economy. Its worst impact is the pressure it puts on household income.

According to the National Bureau of Statistics (NBS), Headline inflation that measures the total rise in prices within an economy, including commodities such as food and energy prices, has risen to 15.75 percent as at December 2020. During this period, businesses suffered supply chain disruptions and subdued demand as major fallouts of both COVID-19 pandemic and EndSARS protest.

Wholesale price index of essential food items, measured by food inflation, has also risen significantly. Food, as we know, is the primary need that every individual seeks to meet. Despite subdued demand for goods due to a number of factors impacting negatively on incomes, food prices have remained sticky, trending upwards as supply disruptions take toll on businesses.

These numbers won’t make much sense without exploring the consequences. In an economy where 39.4 million people may lose their jobs, according to Vice President Yemi Osinbajo, due to the impact of COVID-19 pandemic, higher inflation rate will only make life more miserable for such people as it erodes their purchasing power amid low or no income.

For household investors, inflation rate above rate of return means negative real income. In the Nigeria Treasury Bill market, yields on 1-year bond has fallen from 14.9 percent in November 2019 to 5.91 percent. At 15.75 percent inflation rate, an investor’s inflation adjusted real return for the 364-day T-bill is in the negative. This is the percentage by which, at a minimum, the value of his investment will decline.

It is pertinent to note that higher inflation means higher cost of living for households and will discourage private investments and savings.

For businesses, consistent rise in price levels will mean lower sales, especially for non-essential items, as consumers would rather focus the little they have on essential items such as food. Nigerian businesses will also struggle to raise capital for expansion in an inflationary economic environment, as banks will be less willing to offer long term financing for capital formation and growth. Also, high cost of inputs could see businesses record contraction in profit margins.

Nigeria’s rising inflation rate also poses a risk to government’s ability to implement its budget due to high and uncertain cost of inputs. On the revenue side, the FG may see tax revenue, especially from Company Income Tax and Value Added Tax, decline worsening the country’s current fiscal crisis due to low oil prices.

Finally, high inflation levels will always discourage foreign inflow of funds.

It is, therefore, important that discourse around driving down inflation to reasonable levels should be encouraged. In line with a report by PwC, we must define strategic approaches to put a lid on consistent upward-flexible commodity prices, which impact negatively on household income and businesses.

We align with the report that one such way to define approaches is by supporting adequately the agricultural and food processing sectors to boost supply. The Federal Government must provide adequate supply-chain mechanisms to facilitate unrestricted supply of food and other essential incentives. Policies, both monetary and fiscal, that will foster stability on the supply side of the market, must be encouraged.

The Nigerian food prices have been a major factor pressuring Nigeria’s core and headline inflation numbers. We recommend that while measures to put money back into the hands of households is necessary to ease the suffering of the people, a complementary effort will be to improve supply of goods and services.