Is inflation too big for the CBN to handle? (I)

With the core mandate of ensuring low and stable prices, the Central Bank of Nigeria (CBN) seems to be losing its grip on achieving this fundamental objective as Nigeria’s inflation story repeatedly frustrates the apex bank’s efforts.

According to the National Bureau of Statistics (NBS), current inflation figures depict a contentious realisation in the country’s inflation drama, as general price levels continue to follow a double-digit trend, far away from the targeted zones.

The index of consumer prices (CPI), which measures the percentage change in the price of over 700 goods and services consumed by Nigerians daily, stands at 15.63% as of December 2021. Compared to a month before, CPI recorded a lower rate of 15.40%. This means that inflation in the country worsened by 0.23% in just 30 days. Hence, during the just-concluded Yuletide period, Nigerians had to part with 0.23% more from their income, on average, if they must enjoy the Christmas and New Year celebrations.

Elevated rates in the index of consumer prices have been majorly faulted on rising food prices in response to accelerated demand during the festivities, the CBN has mentioned. Also, there are records of other non-food products whose market activity also contributed to the increase in prices. For instance, food price inflation in December 2021 was 17.37%, while other non-food products such as transportation, clothing and footwear, miscellaneous goods and services, and housing and utilities recorded 15%, 15.1%, 14.1% and 11.1% within the same period, respectively.

The yearly core inflation rate, which excludes agricultural products and energy prices, recorded its highest rate since April 2017, last December. With a rise to 13.87% from 13.85% the preceding month, Nigeria’s current inflation experience, having discounted the most volatile components from the overall index of consumer prices, shows a continuous drive towards proving that the Central Bank may lack what it takes to tackle inflation in Nigeria.

However, this may be a hasty conclusion as there may be more than meets the eye regarding the apex banking authority’s ability to address the country’s high inflation dilemma.

Indeed, policy-making is a daunting task, especially in a highly volatile and unpredictable environment. However, what should matter more would be policy makers’ ability to weigh in effectively, through the right and timely policies in-state affairs, to secure planned objectives for the economy.

Read also: What may likely happen if CBN stops dollar sales to banks

To exemplify the CBN’s debacle with the ongoing situation with elevated prices in Nigeria with the biblical David and Goliath story could be overly assuming; it is quite pointy to observe that the current inflation challenge faced in the country rests on the apex banking authority’s inability to make good policy choices at the right time.

What CBN is doing to worsen the inflation situation

i. Maintaining a high-interest regime and undue interference in structural supply-side factors of inflation

Treating cancer with malaria drugs will not work. Hence, trying to remedy inflation that is largely caused by structural/cost-push factors with demand-pull remedies will return in frustration. Cost-push influences basically cause Nigeria’s current inflation dilemma. The CBN has consistently maintained the anchor interest rate at 11.5% with the asymmetric corridor of +100/-700 basic points around the monetary policy rate (MPR).

Raising or maintaining a high-interest rate in the face of cost-push inflation can adversely affect the economy. Higher interest rates during cost-push inflation affect credit access and currency value. Eventually, production costs increase while imported goods become more expensive. The incidence of the higher costs is eventually passed onto the consumers. In contrast, when demand-pull inflation is experienced, the increasing interest rate will help to slow demand through higher borrowing costs and this will continue to happen until excess demand in the economy is wiped off to balance with existing supply capacity.

Cost-push inflation also accrues to structural causes, which can be linked to production and supply deficiencies. As Nigeria depends on oil proceeds, changes in the price and volume of oil produced will significantly affect home-based outcomes. The supply of foreign exchange in the country largely depends on the quantity of revenue generated from production activities in the country’s oil sector since the sector maintains the position as Nigeria’s major export earner.

Furthermore, issues that border insecurity, food security and value chain production, weather conditions, transportation, distribution and supply chain infrastructure contribute largely to cost-push inflation. Domestic prices will be affected when the cost of production increases either through higher material imports and other input costs or supply scarcity in the foreign exchange market. The ensuing inflationary effect will cause the local currency to lose its value.