3 Reasons Inflation is Rising in Nigeria

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I opened my email today and I got a message from Access Bank (yes, I have an account with Access Bank) providing me with details of its inflation forecast for January 2015. According to the email, the Economic Intelligence Unit (EIU) of Access Bank forecasts that the inflation rate would have risen to 8.2% in January 2015 from 8% in December 2014 to mark a 2.49% increase in one month.

The inflation forecast released by the EIU precedes the release of the National Bureau of Statistics (NBS) inflation figures for 2015, which is expected in the next couple of days. The EIU’s inflation forecast for January 2015 was completed using an autoregressive analysis of past prices. The forecast also takes cognizance of the assumptions used by the NBS in computing the monthly composite consumer price index (CCPI).

What is Inflation?

According to Investopedia, inflation is defined as a sustained increase in the general level of prices for goods and services. It is measured as an annual percentage increase. As inflation rises, every Naira you own buys a smaller percentage of a good or service.

In essence, inflation means that the prices of goods and services increase over a certain period and a fixed Naira amount will only buy lesser amounts of goods and services as the inflationary trend progresses. Hence, an increase in the inflation forecast for Nigerian consumers suggests that your salary won’t be enough to buy the same volume of goods beforehand.

Nigerian Inflationary Trend in the Last One Year

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The chart above (courtesy of the NBS and EIU) depicts the inflationary trend in the Nigerian consumer market in the last one year. You will observe that the inflationary trend has maintained a single-digit fluctuation for the second year since 2013 to suggest that the inflationary trend is operating with low-volatility. In addition, the single digits inflation rate is in line with the CBN’s decision to keep inflation in check between 6% and 9% in 2014.

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From the chart above, you will notice that the inflation rate fell to its lowest level in March 2014 when it came in at 7.7% and the inflation rate was highest in August 2014 when it came in at 8.5%. If the NBS’ inflation outlook comes in at 8.2% in line with the EIU forecast, it means that we have had three straight months of a drop in the inflation rate followed by three straight months of an increase in the inflation rate.

Forces Driving Inflation Up In Nigeria

The first point driving inflation up is an increase in the prices of food coming up from the Northeastern part of the country. The supply of food from the northeastern part of Nigeria has been reduced drastically as unrest continues to prevail in the region. Going forward, we can expect continued shortage in food supply and a concomitant increase in food prices until the insurgency is reasonably contained.

Secondly, the decision of the Central Bank of Nigeria to tighten its monetary policy, austerity measures and the devaluation of the Naira will also contribute imported inflation to the consumerism trends in the country. For one, importation of foreign-produce will come with a higher markup cost as importers find it increasingly hard to obtain forex and as they have to pay more Naira to buy Dollars because of the devaluation.

Thirdly, increased pre-election and campaign spending has flooded the market with a systemic liquidity that has increased the supply of money in circulation. An increase in the supply of money will naturally give birth to inflation in line with regular dynamics of how demand and supply influence the price of goods and services.

Source: nigerianbulletin.com

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