Nigeria’s headline inflation rate quickened for the ninth straight month to 26.72 percent in September, largely on the back of the continued depreciation of the naira.
Data released by the National Bureau of Statistics (NBS) on Monday showed that inflation rose to a new 18-year high of 26.72 percent from 25.80 percent in the previous month.
“With prices rising, fingers are pointing towards the exchange rate as the major inflation culprit,” analysts at Financial Derivatives Company Limited (FDC), led by economist Bismarck Rewane, said in their latest economic bulletin.
They said the naira crossed the psychological threshold of 1,000/$ in the parallel market, pushing up imported inflation despite the relative stability in global food prices.
“Apart from the languishing naira, there are other inflation-stoking factors including higher logistics costs and money supply growth (36 percent year-on-year),” they added.
According to FDC, the price of diesel, the major fuel used by trucks for logistics and distribution purposes, surged to a record high of N1,030/litre.
A breakdown of the NBS’ latest consumer price index report shows that food and non-alcoholic beverages contributed the most (13.84 percent) to increase in the headline index, followed by housing water, electricity, gas and other fuel (4.47 percent), clothing and footwear (2.04 percent), transport (1.74 percent), furnishings and household equipment and maintenance (1.34 percent) and education (1.05 percent).
Others are health (0.80 percent), miscellaneous goods and services (0.44 percent), restaurants and hotels (0.32 percent), alcoholic beverages, tobacco and kola (0.29 percent), recreation and culture (0.18) and communication (0.18 percent).
“The country’s headline inflation reflects the continued pass-through from the removal of fuel subsidies and the naira’s devaluation,” David Omojomolo, Africa economist at Capital Economics, said.
He said the Central Bank of Nigeria (CBN) will need to respond aggressively with a large interest rate hike to reassure investors that the policy shift is still on track.
The NBS report also revealed that food inflation, which constitutes 50 percent of the inflation rate, rose to 30.64 percent in September, the highest in 18 years, from 29.34 percent in August.
The rise in food inflation on a year-on-year basis was caused by increases in prices of oil and fat, bread and cereals, potatoes, yam and other tubers, fish, fruit, meat, vegetables and milk, cheese, and eggs.
Core inflation, which excludes the prices of volatile agricultural produce, stood at 21.84 percent in September on a year-on-year basis, up by 4.35 percent when compared to the 17.49 percent recorded in September 2022.
“Looking forward, we expect the pressures on inflation to persist, especially on the food component of the headline index,” said Ayodeji Ebo, managing director/chief business officer at Optimus by Afrinvest Limited.
“While September marks the commencement of the harvest season, the continued closure of the Niger border, insufficient rainfall in July and August, potential flooding warnings across 32 states, including the FCT, and the likely increase in petrol prices will push food inflation higher in the coming months,” he added.
The Tinubu administration’s reforms such as the removal of petrol subsidy and naira devaluation, implemented in the second quarter of the year, increased the cost of living in the country.
The removal of the fuel subsidy tripled the petrol price to N617 from N184, causing public transportation providers such as buses, tricycles and motorcycles to raise transportation fares.
The floating of the naira increased the official exchange rate from N463.38/$ to N764.86/$ as at Friday while the parallel market rate stood at N1,049 /$.
The high cost of dollars and the implementation of a 7.5 percent value added tax on diesel imports, which was suspended last month, pushed its pump price to as high as N1,200 per litre.
Inflation pushed an estimated four million more Nigerians into poverty in the first five months of this year, the World Bank said in June.
Afolabi Mojeed, a Lagos-based businessman with a family of five, told BusinessDay that he reduced the portion of food that his family consumes to adjust to recent economic realities.
“Early last year I could conveniently buy a loaf of bread and a derica of rice for a little over N1, 000, but presently, just a derica of rice costs N1, 000. Now we eat more beans because it is cheaper, but we cook it on a charcoal stove to save gas,” he said.
Nigeria’s surging inflation rate is also making many products unaffordable as manufacturers’ inventory of unsold finished goods rose by 45.4 percent to N272 billion in the first half of 2023 from N187.1 billion in the same period of last year, according to the Manufacturers Association of Nigeria.
“The increase in inventory can be attributed to a weakened purchasing power of the consumers, brought about by diminishing real household income resulting from the ongoing escalation of inflationary pressures, compounded by the scarcity of naira in Q1 and the aftermath of the subsidy removal,” the association said.
According to Israel Odubola, a Lagos-based research economist, inflation at 27 percent is injurious to the economy, considering growth isn’t that strong.
“It puts more pressure on purchasing power, squeezes wallets and depresses people’s real income. If inflation keeps galloping, it could push more Nigerians below the poverty line,” he said.
He added that price growth for small businesses means increased cost of operations, which will have negative implications for their profitability. “For investors, it widens the real interest gap, making Nigerian assets less appealing.”
Chinyere Almona, director general at Lagos Chamber of Commerce and Industry, said businesses will implement a variety of cost reduction strategies, including downsizing and local sourcing of input factors to lower operating expenses.
“Also, household real income will continue to experience decline, especially in the near term.”
In a bid to reduce the surging inflation in Africa’s biggest economy, the Central Bank of Nigeria (CBN) increased the country’s benchmark interest rate, also known as Monetary Policy Rate, by 725 basis points to 18.75 percent since May last year.
“The new Monetary Policy Committee has an unenviable inflation task and will need to respond with aggressive monetary tightening. It’s been almost three months since the CBN’s last meeting in July, in which it underwhelmed with a 25 basis points hike and we’re still yet to hear when the next meeting will be,” Omojomolo of Capital Economics said.
He added that policymakers will need to act more aggressively when the meeting occurs. “We think they will raise rates by 200 basis points to 20.75 percent. But there is a clear risk that officials are slow to respond, or are swayed by growth concerns, which would risk making the inflation problem worse, not better.”
The International Monetary Fund projected last week that inflation would slow the country’s economic growth to 2.9 percent in 2023.
“Growth in Nigeria is projected to decline from 3.3 percent in 2022 to 2.9 percent in 2023 and 3.1 percent in 2024, with negative effects of high inflation on consumption taking hold.”