Taming the Rising Consumer Price Index

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As the factors that drive inflation prevail and the consumer price index continued to maintain its upward streak, Kunle Aderinokun looks at the policy measures of the monetary authority in managing the rising inflation

The National Bureau of Statistics last weekend put the figures for the consumer price index, which measures inflation, in September at 17.9 per cent. The September inflation represented an increase by 0.24 per cent from 17.61 per cent of the previous month. In releasing the data, the NBS attributed the rise in inflation mainly to increases in the sub-food index as well as energy prices.

Inflation has continued to rise unabated for more than a year. Besides the perennial forex shortages that have contributed significantly to pushing up inflation, NBS pointed out that the increases in sub-food index and energy prices, were mainly responsible for the rise in inflation to the September level. The aggregate of these factors have put inflation in the upward trajectory.

In June, inflation rose by 0.9 per cent to 11-year high of 16.48 per cent compared to 15.58 per cent in May. This was after it jumped to a nearly six-year high of 13.72 per cent in April from 12.77 per cent in March. Adducing reasons for the galloping inflation, NBS had stated that energy prices, imported items and related products were persistent drivers of the core sub-index while the highest price increases were noticed in the electricity, liquid fuel (kerosene), furniture and furnishings, passenger transport by road and fuel and lubricants for personal transport equipment.

And in September, inflation increased to 17.9 per cent from 17.61 per cent in August and 17.13 per cent in July. Expatiating on the factors responsible for the September inflation, the statistical agency noted that the food sub index increased by 16.6 per cent (year-on-year), up by 0.19 percentage points from rate recorded in August (16.4 per cent). It added that, urban inflation rose by 19.5 per cent (year-on-year) in September from 19.3 per cent recorded in August while the rural index increased by 16.4 per cent in September from 16.1 per cent in August. On a month on month basis, both the urban and rural index eased, increasing by 0.8 per cent a piece.

Energy and energy related prices continued to be the largest increases reflected in the core sub-index. In September, the core sub-index increased by 17.7 per cent during the month, up by 0.5 per cent points from rates recorded in August (17.2 per cent).

Addressing the media shortly after the meeting of the Central Bank of Nigeria monetary policy committee in July, the CBN Governor, Godwin Emefiele, lamented that inflation had risen significantly, eroding real purchasing power of fixed income earners and dragging growth. In fact, the rising inflation left interest rates in the upper territory.

But rather than focus on growth, the CBN opted to target inflation, hence its decision to increase the monetary policy rate (MPR), the benchmark interest rate, to 14 per cent by 200 basis points from 12 per cent. And statistics have shown that there had been slowdown in the pace of inflation increase. For instance, in August, the inflation rose by 0.48 per cent to 17.61 per cent from 17.13 per cent in July. Before this period, inflation had increased by 0.90 per cent to 16.48 per cent in June from 15.58 per cent in May.

However, it is yet to be determined whether the decision taken by the CBN to target inflation was responsible for the slower pace of inflation increase or the slowdown was due to other reason(s).

Notwithstanding, economic analysts and market watchers have their opinion as to what has been at play with the inflation.

In her estimation, Managing Director and Chief Economist, Global Research, Africa, Standard Chartered Bank, Razia Khan, “the slowdown is largely seasonal.”

She, however, cautioned that “FX liquidity shortages persist”, putting further pressure on inflation

Reasoning along the same line of thought, Executive Director, Corporate Finance, BGL Capital Ltd, Femi Ademola, argued that, “From the results of several research studies conducted, it has been established that Nigerian inflation is due to structural challenges and not liquidity-induced. The CBN, he added, has also “agreed to this fact by accepting that inflation in Nigeria is not a monetary phenomenon.”

“It thus follow that any monetary policy targeted at combating inflation is not likely to work except some concerted efforts are made to resolve the structural challenges. That is why most contributors to economic discussions advise the focus on infrastructure development and structural adjustments with implications for inflation.”

Ademola contended that “the decision of the MPC to increase interest rate is not directly targeted at inflation,” lamenting that “the decision has a negative impact on growth”, he said “its main objective was to help with exchange rate stability by attracting foreign investments into the country.”

“The thinking of the committee was that with an increase in interest rate, yield on Nigeria’s securities would become higher than inflation; resulting in a positive real yield. The positive real yield was expected to attract foreign investors to purchase our securities thus improving the supply of foreign currency into the country. Although not substantially, the policy appears to have attracted some investments as expected by the CBN.”

Ademola submitted that, “Since inflation in Nigeria is not a monetary phenomenon, I don’t think the CBN will be successful in taming inflation until all the structural issues are dealt with. In my opinion, the CBN should bring down interest rate with the aim of stimulating economic activities. As advisers to the Federal Government, the CBN should also advise the government to borrow at the low rate only for investing purposes.

That is for capital projects that are economic in nature. With this kind of handshake between the monetary and the fiscal authority, the country could be able to resolve the structural issues and then be able to use monetary policy tools to manage inflation going forward.”

To the Chief Executive Officer of Global Analytics Consulting Ltd, Tope Fasua, “the CBN would likely tell you that it has slowed down the rate of increase in inflation.”

The MPC, he recalled , had increased its benchmark rate a few months back, “to so much criticism across the country”, pointing out that,” their aim was to slow down inflation.”

Fasua, however, argued that, the current inflation was not liquidity-induced but driven by pricing decisions made by producers and retailers with a view to accommodating their cover costs.

According to him, “Most Nigerians agree though, that the current inflation we face is not driven by too much spending, but rather the hard decisions that producers and retailers have to take – increasing prices to cover costs. Costs are also driven up by the devaluation of the Naira.”

“It could be argued though that if the MPC had followed the popular route of dropping interest rates, we could have seen a larger leap in inflation indices – for a rate drop will certainly help Naira devaluation in unleashing havoc on the economy. I believe that if better policies are effected around FX availability, we would see a reduction in inflation, even though prices will probably never return to what they used to be. Ultimately, the way forward is the reinvention, not even a diversification, of the economy,” he posited.

An analyst and investment manager, Adetola Odukoya, was of the opinion that, “the fundamental driver of the recent spurt in inflation is as a result of the weakening of the domestic currency versus other major currencies. “Therefore, given our import-dependent economy, this obviously led to higher prices within the economy.

Meanwhile, in my view, regardless of the deceleration of the pace of inflation, I would assess the cost of targeting inflation vis a vis engendering growth in an economy with a young population and need for growing industries, whether large, medium of small,” Odukoya concluded.