I had written most of this article but kept same in abeyance for some time as I prioritised other thoughts. However, I came across a recent article by Zachary Taylor in The New Yorker, titled ‘What if We Are Thinking About Inflation All Wrong?’ (see https://www.newyorker.com/news/persons-of-interest/what-if-were-thinking-about-inflation-all-wrong), which offered new insights into the subject matter, and which validated some of my earlier thoughts – especially that we need to broaden out our inflation management strategies.
I think Nigeria has been rather inactive about managing inflation. We have been applying only the orthodox approach which is all about increasing monetary interest rates. As much as we have increased the Monetary Policy Rates by 5.5 per cent in the last 12 months, inflation has climbed rather steadily to 22.22 per cent today, with a slight dip some months back, followed by steady rises. Apparently, that strategy has been suboptimal.
More next week
The article I refer to was written around the work of Isabella Weber, an economist, who in the thick of the Omicron/COVID-19 scare in 2021 had written in the Guardian of UK, suggesting that countries may consider some sort of strategic price control as they had in similar times in the past – notably during and after the Second World War. She suggested that conditions under covid were same as that of a world war.
The article was not taken lightly in academic circles, with Nobel Prize winner Paul Kruger calling it ‘truly stupid’. Others called it ‘unsound’ and other very flowery names. The article, which relied very much on history (I had written in the past about how Economics as a field of study swore off history to its own detriment), noted that there was a high consumer demand for goods, record corporate profits, production bottlenecks in that era when the world was trying to recover from COVID-19, just as happened as the world recovered from WWII.
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I would add that Nigeria – and most African countries – are in that exact same position (permanent chaos), and should not be prescribed with same medications as plateaued, stable western countries – like this idea that by tweaking interest rates, inflation will fall. It just has not.
For better perspective, the Office of Price Administration prohibited companies from raising prices above certain levels in the period referenced. Companies that violated were threatened with prosecution or worse. In fact, the National Guard removed Sewell Avery, chairman of Montgomery Ward, a department store chain who refused to toe the line. In that time too, interest rate management of inflation had failed, creating higher unemployment, lower productivity and making it harder for the military to obtain equipment/supplies for the war.
The price caps, rather than ruin companies, encouraged them to produce more to meet profit targets. They, therefore, had to employ more people, thereby keeping the economy robust through the remaining of the war, with American wartime inflation steadying 2% as against World War I when things went haywire.
Weber notes that even today, in a host of key sectors, the same strategy has been deployed post -covid. Hear her, “The European Union is regulating the price of natural gas, the Biden administration is regulating the price of gas (petrol), and the G-7 is enforcing a global cap on the price of petroleum products produced in Russia (as part of their support for Ukraine, but price regulation all the same).”
“Zachary Taylor’s article goes further; Inflation in the western world appears to be cooling today, and by nearly every measure we are living in the best labour market in a quarter century… In February, the European Union began implementing a separate price cap on natural gas that applies to the entire Eurozone…Late last year, the G-7 implemented a global price cap on Russian oil—an effort to keep Russian energy flowing to developing nations that rely on it while limiting the Russian government’s ability to profit. In the first few months of 2023, Russian oil revenues were down 40 per cent. Weber’s research centred around what she termed “sellers’ inflation”.
Her work revealed that despite $4 trillion spent on COVID-19 by Trump, and another trillion since Biden, “most inflationary pressure came from large spikes in the prices of specific products and commodities, such as natural gas. By 2022, the ongoing chip shortage had resulted in the fewest annual sales of new cars in more than a decade. Still, profits were up—car companies posted their best earnings in six years”. How did car companies post best-ever profits with fewer car sales?
She also noted that “the higher upstream the supply disruption, the greater the ultimate impact on consumers. Raise the price of electricity or oil, for instance, and suddenly everything becomes harder to make or move. The same is true for chemicals, metals, lumber, or any of the basic commodities required to produce more complex products.
If a government could somehow prevent the price of these magnifiers from getting out of hand, it could stave off inflation… corporate profits are a key driver of today’s inflation is now openly embraced by the establishment on multiple continents. Researchers at the Kansas City Federal Reserve recently concluded that corporate price markups may have accounted for more than half of the inflation experienced by the US in 2021”.
Things have turned around for Weber. Today, she is feted by Bloomberg, US Congress, Financial Times, Washington Post, European Central Bank etc. Paul Kruger apologized to her openly in January 2023.
I have quoted extensively from the article because many readers will be wont to dismiss this new bent of research. One thing is for sure. The ignorance of history has become the undoing of economics – especially for countries like Nigeria.
I will now move on to other strategies beyond interest management that we could use to wrestle down our soaring inflation – which is expected to soar some more with the removal of fuel subsidies and the attendant price gouging (when companies and retailers add more to their prices beyond the effect of the fuel price increase).
Other strategies aside from interest rate manipulation
Whereas 2% – 4% inflation is considered to be healthy inflation (for matured economies), and we may run up to say 6% – 8% in our economy without any sense of panic, the Central Bank of Nigeria has set its inflation target at anything below double digit. Let’s call that 9%. We are thus 13% above this target. How else can we force down inflation? And what latitude can we entertain especially because high rates of inflation also usually come with high GDP growth rates?
The contention for me is that we should target much higher rates of growth in our GDP than the 2%-3% that we are doing and projected to do presently. It’s actually quite depressing when one sees such projections. Can we accommodate lower double-digit inflation as a price for much higher GDP growth rates? The new administration has gone all out to promise a GDP growth rate of between 8% to 10%. How can we achieve this without letting inflation run away any further?
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