There is a question that is becoming increasingly difficult for Nigerian households to reconcile with the official economic numbers: if inflation is falling, why does almost everything still feel expensive?
The question is not unreasonable. Nigeria’s headline inflation rate has fallen substantially from the exceptionally high levels recorded during the worst phase of the cost-of-living crisis. In August, the National Bureau of Statistics reported headline inflation at 15.39 per cent, marginally lower than 15.43 per cent in July and far below the level recorded a year earlier. Food inflation also moderated to 19.57 per cent, while month-on-month headline inflation fell sharply to 0.71 per cent from 1.57 per cent in July.
These are meaningful improvements. They suggest that the extraordinary speed of price rises has slowed, and that the Central Bank of Nigeria responded with a substantial ‘reset’ of monetary policy, cutting its Monetary Policy Rate by 350 basis points to 23 per cent last month.
Yet a visit to a Nigerian market produces a different impression. The prices of food, transport, housing, electricity, school fees, and many household necessities remain high. For millions of Nigerians, their concern is not whether prices are increasing more slowly than before. They want to know whether the prices have become affordable again.
This is where one of the most misunderstood concepts in economics becomes directly relevant to everyday life: falling inflation does not mean falling prices. Inflation measures the rate at which prices are changing. The price level measures where those prices are. If the inflation rate falls from 25 per cent to 15 per cent, prices have not fallen by 10 per cent. They are still rising, only more slowly.
The August CPI illustrates the point. Although annual inflation declined slightly, the CPI increased from 145.3 in July to 146.3 in August. In other words, the average price level continued to rise even as the rate of increase slowed.
Let us consider a simple example. If a basket of household necessities cost N100,000 and prices increased by 30 per cent, the basket would cost N130,000. If inflation subsequently falls to 15 per cent, the basket does not return to N100,000. It becomes N149,500. The rate at which the price is increasing has fallen, but the price itself is substantially higher than where it started. That is essentially the problem confronting Nigeria. The country may be winning the battle against accelerating inflation, without having won the battle over the high price level created by several years of rapid price increases.
For households, the difference is an everyday reality. A family whose monthly food bill rose from N100,000 to N180,000 cannot recover its lost purchasing power simply because food inflation subsequently falls. It needs either food prices to decline, household income to rise sufficiently, or productivity and competition to improve enough to prevent another round of large increases.
This is why the language of disinflation needs to be handled carefully. Nigeria is experiencing disinflation, which simply means that the rate of price increases is moderating. That is a positive development because an economy cannot plan efficiently when prices are changing rapidly and unpredictably.
But disinflation is not deflation. It does not reverse previous price increases. Indeed, the August figures contain both encouraging and sobering information. The NBS reported a significant moderation in month-on-month inflation, while the Central Bank’s September monetary-policy communiqué noted that food and core inflation had also moderated. The CBN interpreted the sustained easing in underlying price pressures as part of the basis for its decision to reduce interest rates.
The problem is that monetary stability and household affordability are connected, but they are not the same thing.
The CBN can influence the pace at which prices rise through interest rates, liquidity conditions and exchange-rate stability. It cannot, by itself, reduce the accumulated price of a bag of rice, a bus journey, a rented apartment or a school term.
That requires a different set of economic forces: higher productivity, lower energy costs, better transport infrastructure, more efficient food distribution, stronger domestic production, a more predictable exchange rate and, crucially, incomes that grow faster than the cost of living.
This is also why the current inflation debate cannot be reduced to the monthly CPI number. Take the case of food, for instance. Food inflation fell to 19.57 per cent in August, but that still means food prices were, on average, rising at nearly 20 per cent annually. For a household that spends a large share of its income on food, even slower increases can remain financially devastating when income has not kept pace with previous price increases.
There is another complication. Some of the forces that helped Nigeria achieve disinflation can themselves create a difficult adjustment for households.
Greater exchange-rate stability can reduce the pace at which imported goods and imported inputs become more expensive. Better domestic refining can eventually reduce dependence on imported petroleum products. Higher agricultural production can improve food supply. Lower interest rates can eventually reduce financing costs.
But these improvements take time to travel through the economy. And sometimes the transmission works in the opposite direction. Rising international oil prices, for example, recently pushed Nigerian petrol prices towards N1,400 per litre in Lagos and Abuja and as high as N1,500 in parts of the North, while diesel prices moved above N2,000.
This is why Nigeria now faces a more difficult economic task than simply bringing inflation down. The first task was to stop the acceleration in prices. The next is to make the economy capable of producing goods and services more cheaply. That requires moving from stabilisation to productivity.
SOURCE: dailytrust.com