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Inflation bites deep into Nigeria’s ailing economy

The National Bureau of Statistics (NBS) on Friday released the inflation figures for December 2020. The figures indicated that inflation increased by 15.75 percent (year-on-year) in December 2020 – the highest in two years. This is 0.86 percentage points higher than the rate recorded in November 2020 (14.89 percent).

This figure is in tandem with reality reflected in the spending pattern of Nigerians during the festive period and thus no surprise. As a result of the buying pressure as well as celebration that came with the festive season, prices were naturally expected to rise. However, this does not serve as any indicator for any serious economic challenge as it is patterned in line with rational human behaviour.

On a month-on-month basis, the headline index increased by 1.61 percent in December 2020. This is 0.01 percentage points higher than the rate recorded in November 2020 (1.60 percent). The percentage change in the average composite consumer price index ( CPI) for the twelve months period ending December 2020 over the average of the CPI for the previous twelve months period was 13.25 percent, a 0.33 percentage point increase over 12.92 percent recorded in November 2020. These figures are not far-fetched as the trend of inflation from the third quarter of the year was on a constant rise.

As a result of large food purchases during the festive periods, a large portion of inflation in December was embedded in food inflation as the composite food index rose sharply by 19.56 percent compared to 18.30 percent in November 2020. This rise in the food index was caused by increases in prices of bread and cereals, potatoes, yam and other tubers, meat, fish, fruits, vegetables and oils and fats.

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Some other major contributors to this spike could be the supply-chain disruptions due to COVID-19 and high-level insecurity for both farmers and citizens alike. The COVID-19 restrictions affected the movement of products within the country as well as outside the country as Nigeria remains a heavy import-dependent economy. Those restrictions led to increase in prices of products and more delayed time in delivery of products to businesses.

Also, denial of access of farmers to their farmlands as well as distribution channels played a major role from the domestic point of view as farmers paid ransoms fees to bandits and hoodlums before any agricultural activity could commence.

Also, the issue of double currency restructuring in 2020 played a major role in the increase in prices. The naira dropped from N305 to N360 to N380, and it is happening after going nearly four years without any devaluation (2019: N305, 2020: N360-N380). This devaluation dampened the purchasing power of the naira.

Core inflation remained relatively decent as it stood at 11.37 percent in December 2020, up by 0.32 percent when compared with 11.05 percent recorded in November 2020.

This was as a result of stability in energy prices, manufactured products, pump price for fuel, gas etc. On a month-on-month basis, the core sub-index increased by 1.10 percent in December 2020 representing a sharp 0.39 percentage point spike when compared with 0.71 percent recorded in November 2020.

The major contributors to the rise in food inflation are the closure of borders, supply disruptions due to COVID-19 between December 2019 and December 2020, exchange rate moved twice as a result of dual devaluation in 2020, huge disparity of about 25% between the official exchange rate and the parallel market rate between December 2019 and December 2020 and also the unrelenting buying pressure that accompanies the festive seasons.

The trickle-down effect of this inflation is going to settle and subsequently have a significant impact on households since high inflation rates lead to weaker purchasing power of citizens.

Also, as prices continue to rise, household savings will likely fall as more spending will be required to fund their daily basic needs.

Investors are also likely going to start demanding higher yields in the fixed income market where yields have been pressured far below its fundamental level. Negative inflation premium on treasury yields have risen significantly in recent months as the government has allowed yields to decline far below inflation rate, while inflation has continued to rise consistently over the last two years. We expect to see a continuous drop in demand for treasury bills and other fixed income securities until yields rise to reflect market reality.

All indications point to the fact that high inflation rate is pressured mostly by the spike in food prices hence, the decision to loosen border controls at this time is welcomed and needed to make affordable quality products available and increase competition in the local market which will help deflate prices.

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