Inflation Targeting and Race to Price Stability

By tightening monetary policy and aligning its tools with clear inflation objectives, the Central Bank of Nigeria is not only signalling strong support for the federal government’s broader reform agenda but also making a decisive move toward stabilising an economy long buffeted by volatility and uncertainty, writes Festus Akanbi

Inflation is one of the most frequently used terms in economic discussions, yet the concept is variously misconstrued. There are various schools of thought on inflation, but there is a consensus among economists that inflation is a continuous rise in prices.

Aside from the Gross Domestic Product (GDP) rebasing exercise, which had positive feedback, a slight slowdown in food prices is being witnessed, and a seven per cent dip in petrol costs was also a welcome development.

For many Nigerians, the numbers tell a good story and should be a forerunner to exchange rate and price stability.

For many analysts, the focus on price stability derives from the overwhelming evidence that it is only amid price stability that sustainable growth can be achieved.

For the Central Bank of Nigeria (CBN), now is the time to sustain its ongoing efforts to maintain price and exchange rate stability, and it has therefore instituted key policies and measures to tame inflation.

The apex bank’s planned inflation targeting framework and raising the Monetary Policy Rate by 875 basis points to 27.5 per cent in 2024—an essential move to contain inflation and restore stability.

Additionally, the CBN has also been controlling the growth of the money supply to achieve price stability.

Expectedly, Nigeria’s annual inflation rate eased to 22.97 per cent in May from 23.71 per cent in April 2025, the National Bureau of Statistics (NBS) said.

The statistics office said the May 2025 headline inflation rate decreased 0.74 per cent compared to the April 2025 headline inflation rate.

On a year-on-year basis, the NBS said the headline inflation rate was 10.98 per cent lower than the rate recorded in May 2024 (33.95 per cent).

This, it said, shows that the Headline inflation rate (year-on-year basis) decreased in May 2025 compared to the same month in the preceding year.

Nigeria has experienced a sharp increase in food prices in recent years. This trend worsened in 2023 following President Bola Tinubu’s removal of petrol subsidies and adoption of a floating exchange rate for the naira.

This shift has led to a steep increase in the cost of staple food, pushing many Nigerians further into poverty and heightening food insecurity.

The persistent price surge over the past year has led to several farms and businesses closing, with many agricultural producers scaling back their output due to insecurity and unpredictable weather conditions affecting rural areas.

Understanding Inflation Numbers

An economist and CEO, Financial Derivatives Company Limited, Bismarck Rewane, said a stronger oil sector could mean more stable fuel prices and a boost in government revenue.

The Economic Intelligence Unit (EIU) projects a 4% rebound in retail sales in 2025, with consumer spending expected to recover modestly to $127 billion. There was also significant input by the monetary authorities in bringing inflation down.

Director of Trading at Verto, Charlie Bird, said a number of factors, including rising crude oil prices, portend a positive signal for the economy.

He said oil price stability or appreciation, strong dollar liquidity in NAFEM alongside a tight spread to parallel market, stable or increasing foreign reserve data, and any form of FX appreciation with low volatility portend positive signals for the economy, and will impact on inflation data.

Speaking during Cordros Asset Management seminar titled: “The Naira Playbook”, he said the positive impact of CBN’s reforms has continued to affect the market and economic indicators positively.

Also, the inflation targeting framework, which replaces the exchange rate targeting framework, aligns with the apex bank’s determination to bring the inflation upsurge under control in line with its price stability mandate.

Inflation Dip Comes with Benefits

The Comercio Partners, in its 2025 macroeconomic outlook, highlighted that the rebasing of Nigeria’s Consumer Price Index (CPI) to 2024 would also create statistical effects that could lower inflation figures.

From the stabilisation of exchange rates, the normalisation of energy prices following the subsidy removal to improved liquidity in the forex market, the economy has what it takes to achieve price stability within the year.

The Comercio Partners reports emphasised the importance of local refining capacity expansion, particularly with the launch of the Dangote Refinery. This development is expected to reduce the impact of exchange rate fluctuations on energy prices. By relying more on domestically refined petroleum, Nigeria is likely to see a reduction in energy price volatility.

This, combined with a more stable exchange rate, is expected to lower production and transportation costs, creating a positive ripple effect throughout the broader economy.

According to Ifeanyi Ubah, head of investment research and global macro strategist, “We expect headline inflation to decrease to around 15 percent in the first half of 2025, indicating a gradual return to economic stability.”

The report also emphasised the importance of local refining capacity expansion, particularly with the launch of the Dangote Refinery. This development is expected to reduce the impact of exchange rate fluctuations on energy prices. By relying more on domestically refined petroleum, Nigeria is likely to see a reduction in energy price volatility. This, combined with a more stable exchange rate, is expected to lower production and transportation costs, creating a positive ripple effect throughout the broader economy.

Monetary Fiscal Policies Alliance

In its efforts to tame inflation, the CBN recently hosted the Monetary Policy Forum 2025, featuring fiscal authorities, legislative, private sector, development partners, subject-matter experts, and scholars with the theme: “Managing the Disinflation Process”.

The forum is a major push to improve monetary policy communication, foster dialogue, and collaborate on critical issues shaping monetary policy.

During the event, CBN Governor, Olayemi Cardoso, explained that the apex bank’s focus is to sustain price stability, the planned transition to an inflation-targeting framework, and strategies to restore purchasing power and ease economic hardship.

He said the apex bank is continuing its disciplined approach to monetary policy, aimed at curbing inflation and stabilising the economy.

“These actions have yielded measurable progress: relative stability in the FX market, narrowing exchange rate disparities, and a rise in external reserves to over $40 billion as of December 2024.”

Cardoso reiterated that the goal of the CBN is to ensure that monetary policy remains forward-looking, adaptive, and resilient.

In addressing our economic challenges, collaboration is key: “Managing disinflation amidst persistent shocks requires not only robust policies but also coordination between fiscal and monetary authorities to anchor expectations and maintain investor confidence,” Cardoso said.

“Our focus must remain on price stability, the planned transition to an inflation-targeting framework, and strategies to restore purchasing power and ease economic hardship,” he added.

The CBN also focused on strengthening the banking sector, introducing new minimum capital requirements for banks (effective March 2026) to ensure resilience and position Nigeria’s banking industry for a $1 trillion economy.

These reforms and developments reflect the Bank’s commitment to creating an environment that enables inclusive economic development. However, achieving macroeconomic stability requires sustained vigilance and a proactive monetary policy stance.

He said moving from the exchange rate targeting framework to the inflation targeting framework aligned with the apex bank’s determination to bring the inflation upsurge under control in line with its price stability mandate.

Inflation uptick has remained a major concern to the CBN, and it is time to use monetary policy tools to control it.

Already, the data from the National Bureau of Statistics (NBS) showed that the Inflation Rate in Nigeria increased to 34.80 percent in December from 34.60 percent in November of 2024. Inflation Rate in Nigeria is expected to be 32.00 percent by the end of this quarter, according to Trading Economics global macro models and analysts’ expectations.

Market data showed that the various oil price shocks, the Covid-19 pandemic, and most recently, the war between Russia and Ukraine, have resulted in various shocks to the global economy, requiring changes in responses to subdue the monetary and fiscal authorities in the advanced and emerging market economies.

To address these shocks, the CBN plans to migrate from an exchange rate targeting framework to a phased migration and now inflation targeting framework. The CBN has been controlling the growth of the money supply to achieve price stability, but is seeking a change of strategy to achieve better results.