Headline inflation which measures the total rise in prices within an economy, including commodities such as food and energy prices is currently at its highest in many months. Businesses are suffer supply chain disruptions and subdued demand.
For Nigerian households in the country’s present economic dispensation, income levels have dropped to near-zero levels and their value is no more than vegetables in an evening market after the scotching sun.
Still smarting from the severe impact of the Coronavirus pandemic, Nigerian economy slipped into a second wave of recession in five years in the third quarter of this year. That came after the National Bureau of Statistics (NBS) had announced inflation figures put at 14. 2 percent in October.
Effectively, an average Nigerian household is contending with two monsters that have no mercy for its income. The reality on ground is that these twin evils and the pandemic have sent both personal and household incomes in the country to levels which the World Bank estimates at 40 years ago.
The country, which prides itself as Africa’s largest economy, is today facing an unusual crisis occasioned by both the pandemic and lack of political will on the part of its leadership to implement long-overdue economic reforms that would reinvigorate the fundamentals of the economy.
The country is presently in such a time, in its history, when basic necessities for the survival of the common man have become less affordable. The general increase in prices of goods and services without corresponding increase in income levels, which economists call inflation, is worsening the already precarious state of the economy.
Headline inflation which measures the total rise in prices within an economy, including commodities such as food and energy prices is currently at its highest in many months. Businesses are suffer supply chain disruptions and subdued demand.
Wholesale price index of essential food items, measured by food inflation is also high at the moment. Food, as we know, is a primary need that every individual seeks to meet. Despite the subdued demand for goods due to lock-down measures, food prices have remained sticky, trending upwards as supply disruptions take its toll on businesses.
These numbers won’t make much sense without exploring the consequences. In an economy where many people have lost their jobs, and those who still keep theirs may have taken salary cuts, higher inflation rate only makes life more miserable for such people as it has eroded their purchasing power.
For household investors, inflation rate above rate of return means negative real income. In the Nigeria Treasury Bill market, yields on 1-year bond have fallen from 14.9 percent in November 2019 to 5.91 percent. At the current inflation rate, an investor’s inflation adjusted real return for the 364-day T-bill is -5.78 percent. This is the percentage by which, at a minimum, the value of his investment will decline.
It is pertinent to note that higher inflation means higher cost of living for households and will discourage private investments and savings. For businesses, consistent rise in price levels will mean lower sales, especially for non-essential items, as consumers would rather focus the little they have on essential items such as food.
Nigerian businesses are struggling to raise capital for expansion in an inflationary economic environment as banks are less willing to offer long term financing for capital formation and growth. Also, high cost of inputs could see businesses record contraction in profit margins.
Nigeria’s rising inflation rate also poses a risk to the government’s ability to implement its budget due to high and uncertain cost of inputs. On the revenue side, the FG may see tax revenue, especially from Company Income Tax and Value Added Tax, decline, worsening the country’s current fiscal crisis arising from low oil prices. High inflation levels also discourage foreign inflow of funds.
It is, therefore, important that any discourse around driving down inflation to reasonable levels should be encouraged. In line with a report by PwC, we must define strategic approaches to put a lid on consistent upward-flexible commodity prices which impact negatively on household income and business.
We align with the report that one of such approaches is by supporting adequately the agricultural and food processing sectors to boost supply. The federal government must provide adequate supply-chain mechanisms to facilitate unrestricted supply of food and other essential incentives. Policies, both monetary and fiscal, that will foster stability on the supply side of the market must be encouraged.
The Nigerian food prices have been a major factor pressuring the country’s core and headline inflation numbers. We recommend that, while measures to put money back into the hands of households is necessary to ease the suffering of the people, a complementary effort will be to improve supply of goods and services.
– Businessday