By Muda Yusuf
The eight-month steady deceleration in headline inflation was brought to a halt with the marginal spike in the December 2021 headline inflation from 15.4% in November 2021 to 15.63% in December 2021. The surge in demand during the December festivities must have played a role in the marginal spike and reversal of the deceleration trend in headline inflation.
Meanwhile, inflationary pressures remain a significant macroeconomic risk in the Nigerian economy. It is a major concern to both businesses and the citizens. Meanwhile, food inflation, which is the biggest worry for the poor, rose from 17.21% in November to 17.37% in December. But on a month-on-month basis, there was an increase of 2.19%.
The Core inflation, which relates to non-agricultural products, maintained an upward trend. It increased from 13.85% in November to 13.87% in December. This was largely a reflection of the impact of currency depreciation and the liquidity challenges in the forex market.
IMPLICATIONS:
Although the economy witnessed an incremental deceleration in inflation over the past eight months before the reversal in December, high inflationary pressures remain a major concern to stakeholders in the Nigeria economy. Some of the implications are as follows.:Escalation of production and operating costs for businesses, leading to erosion of profit margins, drop in sales, decline in turnover and weak manufacturing capacity utilization, High food prices which impacts adversely on citizens welfare and aggravates poverty. Weak purchasing power which poses significant risk to business sustainability.Price volatility which undermines investors’ confidence.
MAJOR DRIVERS OF INFLATION AND COST IN THE ECONOMY:
Surge in consumer spending driven by the December festivities.Exchange rate depreciation has a significant impact on headline inflation, especially the core sub index.Liquidity challenges in the foreign exchange market impacting adversely on manufacturing output.Security concerns affecting agricultural output.Climate change effects on agricultural production.
There are increasing cases of flooding and desertification in many parts of the country. These have negative impact on agricultural output.Structural constraints affecting productivity in the agricultural value chain.High transportation costs affecting distribution costs across the country. This is also reflected in the huge differential between farm gate prices and market prices.Monetization of fiscal deficit [CBN financing of deficit] is highly inflationary because of the liquidity injection effects on the economy. This becomes worrisome when statutory thresholds are exceeded.High transactions costs at the nations ports increases production and operating costs of businesses.High energy cost.High import duty on intermediate goods and raw materials.
RECOMMENDATION TO TAME INFLATION:
To tame the current inflationary pressure, government need to fix the following:-Reform the foreign exchange market to stabilize the exchange rate and reduce volatility.Address forex liquidity issues through appropriate policy measures.Address the security concerns causing disruption to agricultural activities.Address productivity issues in the real sector of the economy.
Address the challenge of high transportation cost.Reduce fiscal deficit financing by the CBN to minimize incidence of high-powered money in the economy.Manage climate change consequences to reduce flooding and desertification.Ensure the restoration of normalcy and good order at the nations 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.Create an investment friendly tax environment.
