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Nigeria inflation rate: Huge price rises push CBN to take drastic action as IMF slashes growth prospects

By Fitri Wulandari

Edited by Jekaterina Drozdovica

06:08, 21 October 2022

Nigeria flag in the blue sky. Horizontal panoramic banner.
Huge price rises push the Central Bank of Nigeria to take drastic action as the IMF slashes growth prospects for the country.

Inflation rate has continued to accelerate in Nigeria, Africa’s biggest economy, with the September reading showing the pace of price growth reached 17-year high. 

The sky-high inflation, mainly caused by soaring food and energy prices, is expected to push the Central Bank of Nigeria (CBN) to ramp up its tightening cycle, possibly slowing Nigeria’s economic growth. The International Monetary Fund (IMF) on 4 October downgraded its forecast for Nigeria’s gross domestic product (GDP) to 3.2% and 3% for 2022 and 2023, respectively.

What will be the outlook for Nigerian inflation rate this year and beyond? We examine historical data of Nigerian price growth, what factors may cause inflation in Nigeria, and latest forecasts from analysts. 

What is inflation and how is inflation measured in Nigeria? 

Inflation is an economic term that refers to the gradual rise in the prices of goods and services. It also reflects the decline in money's purchasing power. As a consequence, when prices rise, consumers can buy less with the same amount of money. The loss of purchasing power has a significant impact on the cost of living, causing economic growth to slow.

Nigeria’s National Bureau of Statistics calculates Consumer Price Index (CPI) inflation by measuring the price of goods and services in 12 groups as follow:

  • Food and non-alcoholic beverages

  • Alcoholic beverages, tobacco and kola

  • Clothing and footwear

  • Housing, water, electricity, gas & fuels

  • Furnishing & household equipment 

  • Health

  • Transport

  • Communication

  • Recreation & culture

  • Education

  • Restaurants and hotels

  • Miscellaneous

The country’s CPI basket consists of 740 items. The prices for those items are collected from urban and rural areas in 36 states. Food and non-alcoholic beverages make up more than half of the basket. Nigerians spend almost half of their income on food and non-alcoholic beverages. 

The Central Bank of Nigeria (CBN) targets 9% as the upper limit of inflation rate, according to the World Bank.

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Inflation rate in Nigeria: Historical context

According to economic data provider Trading Economics, Nigerian inflation averaged 12.78% from 1996 to 2022. The all-time high inflation was 47.56% in January 1996 and the lowest was -2.49% in January 2020.

In 2021, inflation in Nigeria was volatile and trended above the CBN inflation rate target. In the first quarter of 2021, the annual inflation rate moved upwards, peaking at 18.17% in March, before easing in the second quarter.

Nigeria’s inflation rate, 2018 - 2022

CBN attributed accelerated inflation to rising food and fuel prices amplified by the weakening naira, Nigeria’s official currency, the bank said in its Monetary Policy Review in August 2021.

Partial land border protection policy and worsening security issues, particularly rampant banditry in farming regions had worsened supply-chain issues, pushing up domestic food prices, the bank said. 

In the second half of 2021, the pace of price increase eased to around 15% and steadied until April 2022 when the annual inflation ticked up to 16.8%. Headline inflation continued to accelerate in the following months to peak at 20.77% in September, the highest in 17 years. 

The surging inflation prompted CNB to ramp up its interest rate hikes. From three rate hikes since May, CBN has increased its policy rate by a cumulative 400 (bps), taking the rate to 15.5% in September.

High food prices accelerate Nigeria inflation rate

Stubbornly high food inflation has remained the main cause of inflation in Nigeria. In September 2022, food inflation rate accelerated 23.34% year-on-year, compared to 19.57% in September 2021. 

Increased prices of bread, cereals, oil and fat have boosted food inflation in September, according to NBS. The data agency said disruptions in the supply of food products caused the price increase. 

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Flooding in most of Nigeria’s states – 29 out of 36 – since September damaged food crops, pushing millions of Nigerians on the brink of a food crisis.

In addition, the Russia-Ukraine war pushed up prices of agricultural commodities, including staples such as wheat, maize, palm oil and rice. Nigeria is one of 15 Sub-Saharan African countries that import 75% of their staples, according to data from the IMF’s Climate Change and Chronic Insecurity in Sub-Saharan Africa report.

Imported fuel spike inflation as domestic output constrained

Soaring domestic fuel prices were another key contributing factor pushing up the current inflation rate in Nigeria. Increasing prices of gas, liquid fuel, jet fuel, and solid fuel drove up core inflation, a measure that excludes volatile agricultural produce, 17.6% in September 2022 from the previous year.

While Nigeria is the largest crude oil producer in Africa, its oil sector has underperformed due to a consistent decline in output. The member of the Organization of Petroleum Exporting Countries (OPEC) faces a number of challenges in pumping more oil, ranging from minimum investment in oil infrastructure to pipeline theft.

According to the World Bank’s data, Nigeria’s oil output has dropped by 11.8% in the second quarter of 2022 to 1.2 million barrels per day (bpd), from 1.4 million bpd in the previous quarter, marking the fifth consecutive quarter of output decline. In August, the country’s oil output hit the lowest in 50 years. 

Lower output forced Nigeria to rely heavily on imported petroleum that saw its price soared above $120 per barrel (bbl) in March on the back of Russia's invasion of Ukraine. Oil prices have retreated since then but remained elevated. The World Bank wrote:

“Due to its heavy reliance on imported petroleum products and constrained oil production, Nigeria did not benefit from favourable terms of trade induced by the Russia-Ukraine conflict.”

Naira depreciation compounded inflation

The depreciation of the Nigerian naira has amplified the issue of rising food and fuel prices. The lower NGN/USD exchange rate makes imports of essential goods, including food and fuel, become more expensive in local currency.

Falling foreign exchange inflows from oil and gas exports due to declining output and dollar scarcity have contributed to naira’s depreciation.

As of 19 October, NGN was trading at record low levels of 0.00229368 against the USD. The currency has weakened nearly 6% against the US dollar in the past 12 months.

NGN/USD exchange rate, 2017 - 2022

Inflation forecasts for Nigeria: 2022 and beyond

In July, Fitch Solutions projected the Nigerian inflation rate to average 17.2% in 2022, before slightly easing to 16.7% in 2023. The firm said:

“Rising consumer price inflation has been the key risk to consumer spending over 2022, and it has been eroding purchasing power and shifting consumer spending away from discretionary spending. This is the economic reality that consumers enter into in 2023.”

The World Bank’s Nigeria inflation forecast suggested the price growth to average 18.5% in 2022, falling to 15.5% in 2023 and 13.5% in 2024. The agency’s Alfrica’s Pulse report released in October noted: 

“The downward trajectory reflects decreasing commodity prices associated with the slowdown of the global economy, particularly China, and the effects of rate hikes.”

Trading Economics, as of 20 October, forecast the inflation rate in Nigeria to accelerate to 22% by the end of this quarter. For the long-term projection, the economic data provider expected Nigeria inflation rate to cool to 15% in 2023 and 12% in 2024. 

The bottom line

Analysts mentioned in this article expected Nigeria inflation rate to subside in 2023 and 2024, in line with the expected fall in commodity prices and as the tightening cycle cools economies. 

Remember that analysts' predictions can be wrong. Forecasts should not be used instead of your own research. Always conduct your own due diligence before trading or investing. And never trade with money you can't afford to lose.

FAQs

What is Nigeria's current inflation rate?

The annual inflation rate in Nigeria stood at 20.77% in September 2022.

Why is Nigeria's inflation rate so high?

Soaring imported food and fuel prices on the back of the Russia-Ukraine war have been the main drivers to high Nigerian inflation rate.  A weakening naira against the US dollar accelerated inflation, as a stronger dollar makes imported goods more expensive in the local currency.

What is the current interest rate in Nigeria?

The current policy interest rate in Nigeria is 15.5%, as of October 2022

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