What inflationary pressures mean for businesses, citizens

Although Nigeria’s economy recorded a marginal decline in headline inflation in January, high inflationary pressures continues to be a major worry to stakeholders in the Nigeria economy, according to Muda Yusuf, Chief Executive Officer of The Centre for the Promotion of Private Enterprise (CPPE).

The National Bureau of Statistics (NBS) reported a marginal drop of 0.87 percent, in headline inflation from 16.47 percent in January 2021 to 15.60 percent in January 2022.

However, on a month on month basis, there was an uptrend in general price level by 1.47 percent between December 2021 and January 2022. Urban inflation remained high at 16.17 percent while rural inflation remained subdued at 15.06 percent in January 2022.

Businesses are affected by inflationary pressures in the area of escalation of production and operating costs, leading to erosion of profit margins, drop in sales, decline in turnover and weak manufacturing capacity utilization, said Yusuf.

For Nigerian citizens, hgh food prices impacts adversely on citizens welfare and aggravates poverty. It results in weak purchasing power which has implications for aggregate demand, and for the Investors, price volatility undermines investors’ confidence.

“With supply constraints likely to persist, the challenge for policymakers is to support recovery without allowing high inflation to become entrenched,” the International Monetary Fund (IMF) said on Thursday.

Core inflation, driven largely by imports, maintained an upward trend. It accelerated by 13.87 percent in January 2022 as against 11.85 percent in the corresponding period of 2021. Between December 2021 and January 2022, there was a 1.25 percent increase in prices, driven largely by core components of inflation.

Read also: How Russia/Ukraine brawl will affect Nigeria’s economy

This, Yusuf said, was largely a reflection of the impact of the depreciation in the naira exchange rate and the liquidity issues in the forex market.

To curb the current inflationary pressure, Muda Yusuf said the government needs to fix the security concerns causing disruption to agricultural activities.
Other things he said government needs to fix include reforming the foreign exchange market to stabilize the exchange rate, reduce volatility and stimulate forex inflows, address forex liquidity issues through appropriate policy measures, address the challenge of high transportation and logistics cost, reduce fiscal deficit monetization to minimize incidence of high-powered money in the economy, and manage climate change consequences to reduce flooding and desertification.

Government also needs to ensure the restoration of normalcy and good order at the nation’s ports to reduce transaction costs, reduce import duty on intermediate products and raw materials for industries to reduce production costs, especially in the light of the sharp depreciation in the exchange rate, address concerns around high energy cost, and create an investment friendly tax environment.

At its last meeting in January, the monetary policy committee (MPC) opted to hold its policy rate and other parameters unchanged, noting that despite the prevailing stagflation, its current pro-growth strategy is desirable.

For now, the decline in the latest headline reading supports the committee’s stance. However, with US inflation at a 40-year high of 7.5 percent in January, the consensus is that the US Federal Reserve will need to be more proactive in hiking rates, starting in March, analysts at FBNQuest said.

Key drivers of inflation in the economy have remained unchanged. These are exchange rate depreciation which has a significant impact on headline inflation, especially the core sub index.

Liquidity challenges in the forex market affecting access to manufacturing and other inputs.

Security concerns disrupting agricultural activities, and Climate change effects on agricultural production., among others.