Inflation refers to the rate at which the general level of prices for goods and services is rising, and subsequently how purchasing power is falling.
Inflation can be caused by a variety of factors such as an increase in production costs, a decrease in the supply of money, or an increase in government spending. When the cost of goods and services goes up, each unit of currency buys fewer goods and services; therefore, inflation reflects a reduction in the purchasing power of money.
In some countries, Central banks attempt to limit inflation, and avoid deflation, in order to keep the economy running smoothly.
How inflation is impacting on economy
One of the major effects of inflation in Nigeria as of today is that many Nigerians now buy lesser quantities of consumables due to the prevailing high prices in the market as high inflation is gradually slowing down all activities in the economy.
Similarly, Nigerian producers are also feeling the pains of high prices as the cost of production has risen, and have become so frustrating to contribute meaningfully to the national output. The prevailing situation in the manufacturing sector can worsen the inflation problem confronting the economy. It is high time actions were taken to save the Nigerian economy.
For instance, in the construction sector, many ongoing construction projects are threatened by price variation as contractors are currently feeling the heat of rising cost of building materials, one of which is cement which is now sold at N9,000 for a bag.
- Economic hardship: Borno, Adamawa traders, labourers chase dreams to Chad, Cameroon
- Hardship: Northern youths seek relief in Middle East, North Africa
The rising inflation in Nigeria can be attributed to a drop in the supply of agricultural products to the market. Many Nigerian farmers in the Middle-Belt and North-East states have not returned to farming due to the fear of being killed or raped by bandits. Also, many other farmers are still practising small-scale farming methods. This is the deviation from large scale farming as Nigeria’s population calls for mechanised agriculture to produce a large quantity and number of agricultural products for consumption.
According to data obtained from the Central Bank of Nigeria (CBN), Nigeria’s inflation figure was on an average, in the range of 8.5 percent in 2013. The country started the year with a 9 percent inflation in January, but later reduced to 8 percent.
The average figure for 2014 was 8.1 percent.
Daily Trust reports the inflation figure was 8 percent in January and ended with 8 percent. While in 2015, the average inflation rate was 9.01 percent with 8.2 percent recorded in January and ended in December with 9.55 percent.
In 2016, as recession was imminent, the country could no longer maintain the single digit inflation rate with the figure jumping to 15.6 percent on average. It entered the year with 9.62 percent and ended it with 18.55 percent.
In 2017, it slowed to 16.5 percent, recording 18.72 percent in January and reduced to 15.37 in December following exit from recession
In 2018, the figure went down to 12.13 percent on an average having recorded 15.1 percent in January and 11.44 percent in December.
The downward trend continued in 2019 with prices of commodities increasing on an average of 11.3 percent. The year saw an 11 percent increase throughout the calendar month starting with 11.37 percent in January while ending with 11.98 percent by December.
In 2022, the average inflation rate was 18.7 percent starting with 15.6 percent and increased to 21.34 percent by December.
For 2023, the figure averaged at 24.52 percent starting with 21.82 percent in January and peaked at 28.92 percent in December.
Why inflation targeting could help Nigeria’s situation
Inflation targeting is a central banking policy that revolves around adjusting monetary policy to achieve a specified annual rate of inflation. This is known as the target rate, which is normally set at around realizable figures according to the country’s macro-economic stability.
The principle of inflation targeting is based on the belief that long-term economic growth is best achieved by maintaining price stability, and price stability is achieved by controlling inflation.
Inflation targeting can be compared with other central bank operating targets, such as price level targeting and nominal gross domestic product (GDP) targeting.
In Nigeria Inflation targeting is a central bank strategy of specifying an inflation rate as a goal and adjusting monetary policy to achieve that rate.
Inflation targeting primarily focuses on maintaining price stability, but its proponents also believe that it supports economic growth and stability and could be laid side by side to other possible policy goals of central banking, including the targeting of exchange rates, unemployment, or national income.
Inflation targeting was first deployed in 1990, when the Bank of New Zealand first deployed it. Today, it is used by most of the world’s central banks.
As a strategy, inflation targeting views the primary goal of the central bank as maintaining price stability. All of the tools of monetary policy that a central bank has including open market operations (OMOs) and discount lending—can be employed in a general strategy of inflation targeting.
It can also be contrasted to strategies of central banks aimed at other measures of economic performance as their primary goals, such as targeting currency exchange rates, the unemployment rate, or the rate of nominal GDP growth.
Interest rates can be an intermediate target that central banks use in inflation targeting. The central bank will lower or raise interest rates based on whether it thinks inflation is below or above a target threshold. Raising interest rates is said to slow inflation and therefore slow economic growth. Lowering interest rates is believed to boost inflation and speed up economic growth.
The role of CBN
The Central Bank of Nigeria who is in charge of monetary policy has the sole target of curbing inflation.
So far, the CBN Monetary Policy Committee (MPC) has not met for more than six months now but are expected to meet on May 26 for the first time since the appointment of Mr. Olayemi Cardoso as governor.
Addressing the National Assembly, CBN Governor Mr. Cardoso, said “Inflationary pressures are expected to decline in 2024 due to the CBN’s inflation-targeting policy, aiming to rein in inflation to 21.4 percent, aided by improved agricultural productivity and easing global supply chain pressures.
“Inflation pressures may persist, albeit temporarily, but are expected to moderate significantly by Q4 2024. Exchange rate pressures are also expected to reduce with the smooth functioning of the foreign exchange market.”
According to the CBN Governor, “We are aware that the twin challenges of inflation and exchange rate depreciation on our economy are daunting, however, they are not insurmountable.
“Monetary policy actions are sometimes inhibited by transmission lags, nonetheless, it is expected that the policy measures implemented by the Bank will permeate the economy in the short- to medium-term.
“We are committed to implementing policies that will ensure a stable macroeconomic environment and guarantee improved livelihoods for all Nigerians.”
Cardoso explained that the CBN’s inflation-targeting framework involves clear communication and collaboration with fiscal authorities to achieve price stability, potentially leading to lowered policy rates, stimulating investment, and creating job opportunities.
On the situation in the FX market, Cardoso said, “The Nigerian foreign exchange market is currently facing increased demand pressures, causing a continuous decline in the value of the naira.
“Factors contributing to this situation include speculative forex demand, inadequate forex supply due to non-remittance of crude oil earnings to the CBN, increased capital outflows, and excess liquidity from fiscal activities.”
He submitted that the shift to a market-driven exchange rate was intended to create a stable macroeconomic environment and discourage currency hoarding, however, he attributed short-term volatilities to arbitrage and speculation.
To address exchange rate volatility, he said that a comprehensive strategy has been initiated to enhance liquidity in the FX markets.
This, he noted, includes unifying FX market segments, clearing outstanding FX obligations, introducing new operational mechanisms for BDCs, enforcing the Net Open Position limit, and adjusting the remunerable Standing Deposit Facility cap.
He acknowledged the economic costs of these developments not just for the economy, but also as they affect ordinary Nigerians, and assured that the costs are temporary as the bank’s decisions will address a lot of fundamental issues bothering Nigeria’s macroeconomic landscape.
Cardoso added that these measures, aimed at ensuring a more market-oriented mechanism for exchange rate determination, will boost foreign exchange inflows, stabilize the exchange rate, and minimize its pass-through to domestic inflation.
