When we cannot explain why prices are rising

Nigeria has arrived at a situation where it is hard now to explain in clear terms why some economic variables, especially costs or prices, are changing in the manner they are doing. This makes economic management at all levels quite difficult. The Madam of the house cannot understand why food money, although it has been raised by the Oga, is still highly inadequate for the needs of the household.

A gentleman recently accompanied his wife to the market, specifically, the food market. Although he had topped the money allocated for food in response to the madam’s complaints over rising prices, the complaint persisted. So, he went with her and saw for himself that madam was right. “I pitied my wife when I saw the prices,” he said.

This is the reality in most homes in today’s Nigeria. People, especially women, who are home managers, are struggling with an unusual dynamic situation where the price of everything is rising in a randomised fashion, thus making planning nearly impossible. We are not just dealing with high prices, although that is part of it. The situation is compounded by the fact that these prices are rising at rates that make a mess of home economics. 

I teach journalism students that business or economy stories are cause-and-effect stories. Such stories would be trite and directionless without clear, causal relationships between the forces at work in the stories. The stories MUST show how actions lead to consequences or impacts, or how changes in economic variables lead to effects on other variables thus creating problems or opportunities and ultimately eliciting interventions.

The initial actions could lead to reactions by government agencies intended to halt or mitigate the negative consequences of the initial actions. Such responses, by people such as investors seeking opportunities, or government agencies in discharge of their duties, form the basis of our reporting in the first place.

Typical examples are changes in economic indicators such as inflation provoking changes in consumers’ choices or even taking food away from people’s tables, and rising interest rates leading to spikes in non-performing loans. In such cases, we report not only the causes but the consequences as well. We report the authorities’ responses, such as the monetary authorities stepping in to address the challenge through policies.

Sometimes, the attribution of the cause-and-effect relationship works, such that a consequence is correctly linked to a known cause. In this case, when the appropriate measure is applied, the result shows and the situation improves. At other times, it does not work out that way; it may not be possible to establish the real causal relationship although we know things are changing as other variables change.

Are we there now? We are approaching that stage now. We know prices (costs in some cases) are rising, but we are becoming unable to explain in specific terms, why some of these costs are rising at the rate they are doing now. This is not healthy for the management of the economy. When we cannot reasonably narrow down the factors behind the movements in the economy, managing that economy becomes more of a guesswork.

Why, for instance, are prices of even locally-made products still rising? We have so far blamed the dollar or the dollarization of the economy, for this, but how much of the change in these prices is actually due to dollar impact?

We need studies on the structure of the economy and the magnitude of these changes due to dollar impact. It seems to me that what the authorities are relying on, what economists refer to as policy variables that need to be attacked for the target variables to be affected, are not quite the right ones.

So, do we know or do we not know why so many costs are rising at the same time? Everywhere costs are rising, including in our localities. What is responsible for this phenomenon?

The price increases are more intriguing because of the rate at which they occur. You go to the market today to buy a certain food item, say crayfish. Within a few days, the price would have risen by an unusual margin, sometimes up to 10 to 20 per cent within a week. These price increases are hardly captured by the official statistics that government agencies are reporting. If they want to get the true picture they should consult the women.

The buyer is surprised at the new price, but the seller is not. The seller is not amazed at the price change, not because he knows the reason, but because he saw that others raised their price, so he had to raise his. 

This applies in some situations. In other situations, the trader knows what the buyer does not know so when she goes with the mindset of the previous week or two, the market punishes her for being ignorant of the new reality of our times.

This poses a great challenge to researchers trying to make sense of the factors driving the current melee in our economy.

I do not know the factors being incorporated into econometric models now that seek to explain these random changes in prices of goods and services, especially, food items.

So, have prices become unresponsive to policies? Could this be the reason inflation continues despite the hikes in the MPR so far?  Perhaps the 150 basis increases announced yesterday, a kind of top-up on what had been done previously, will bring the elixir we all have been waiting for.