Introduction

Nigeria has a history of grappling with rising prices, marked by significant spikes in inflation rates. In the 1990s, inflation soared to 57.03% in 1994 and 72.83% in 1995. This surge was primarily attributed to a substantial increase in money supply, an expansionary fiscal policy, and the depreciation of the national currency.

uring that period, the government successfully curbed inflation by implementing contractionary monetary policies through the Central Bank of Nigeria (CBN) and scaling back on government spending. The inflation dynamics of the 1990s were characterized more by demand-pull inflation, a conventional type where an excess of money competes for too few goods. In such scenarios, the CBN could raise the Monetary Policy Rate (MPR) and sell securities in the open market to reduce money supply, resulting in a subsequent decline in inflation.

However, Nigeria’s current inflation is heavily characterized by rising production costs due to several factors. The economy currently faces more of a cost-push inflation, which limits the effectiveness of monetary policy. Cost-push inflation is largely exogenous to monetary policy tools, making it hard for monetary policy authorities to curb it. Rising production costs, exogenous shocks, inappropriate agricultural policies such as border closures, and insecurity are vital factors that have fed into Nigeria’s current inflation numbers.

For the average Nigerian, the consequences of inflation cannot be overstated. In 2022, Nigeria had about 133 million people living in multidimensional poverty. The rise in the inflation rate over the months only means that more individuals fall below the poverty line. Inflation erodes the purchasing power of money, making it difficult for individuals to maintain the same standard of living. For businesses in Nigeria, the high rate of inflation has both primary and secondary consequences. It raises the cost of inputs in the production process, thereby increasing prices. Higher inflation figures also reduce job security as producers adjust to maintain their profit margins in the face of rising costs. In a cost-push inflationary environment, persistently raising the MPR to combat inflationary pressures can be counterproductive, as it further increases the cost of borrowing and possibly, exacerbates inflation.

Core Determinants of Inflation in Nigeria

Transportation costs, high energy costs, geopolitical tensions, the exchange rate, and insecurity are some key drivers of inflation in Nigeria. These factors are likely to continue playing out in 2024. Noteworthy to mention is the border closure policy, which only increased food prices. Due to nominal rigidity, it takes a significant push in agricultural aggregate supply to bring down food prices.

The removal of subsidies on petrol led to a permanent effect on transportation costs across the country, which has also increased production costs. High energy prices also contribute to inflationary pressure. According to the Manufacturing Association of Nigeria (MAN), energy costs account for about 40% of the total cost of production. As such, an increase in energy costs directly precipitates an increase in the cost of production and prices. Geopolitical tensions, such as the war in Ukraine and tensions in the Middle East, also contribute to inflation in Nigeria through the increase and volatility in commodity prices.

In a bid to unify the exchange rate, the federal government devalued the exchange rate. However, the unification policy has yet to become a reality as the naira has persistently depreciated in the parallel market. The heavy reliance of the Nigerian economy on imports only means that higher exchange rate values translate to higher prices. This phenomenon is commonly referred to as imported inflation.

The growing insecurity across the country has effectively dampened agricultural productivity. With food prices contributing half of the computations of inflation, improving agricultural productivity can aid in reducing the inflation rate in Nigeria. Farmers-herders conflict, banditry, and kidnapping on a large scale have resulted in a decline in farm activities. Declining agricultural aggregate supply only means less farm produce to meet the existing or even growing demand levels, contributing to the rise in food prices.

Inflation will continue to rise in 2024.

Delving into more statistical methods, the inflation rate is predicted to continue to rise in 2024. Using the autoregressive integrated moving average procedure (ARIMA), inflation will remain persistent and grow throughout 2024. While the quality of the ARIMA model's predictability declines with a more extended forecast period, 2024 will see a noticeable increase in inflation.

Complement Monetary Policy with Supply-Side Policies

While money supply is a crucial driver of inflation, as evidenced in theoretical and empirical discourse, inflation in Nigeria cannot be reduced significantly if the inflation targeting objective is left solely in the hands of the CBN. The CBN can maintain its current stance of an MPR of 18.75%, but further increasing the MPR could be detrimental to the Nigerian economy.

Taking insights from the United Kingdom in 2009, the country experienced cost-push inflation from exogenous shocks and the pound devaluation. Nonetheless, the Bank of England retained its rates throughout the period, acknowledging that the inflation experienced was non-monetary.

That said, the fiscal authority and the government have essential roles in ensuring that constraints on the supply side of the economy are effectively identified and mitigated. Implementing targeted policies to enhance infrastructure, address logistical challenges, and promote a conducive business environment will foster a resilient and sustainable supply-side framework.

How can policymakers think about inflation?

Over the past six months, the CBN has refrained from convening a monetary policy committee meeting. This decision may signify an acknowledgment that the primary tool at the CBN's disposal for mitigating inflation has demonstrated limited effectiveness. The current approach could be likened to a do-nothing approach, which, in practical terms, is an economic policy.

Rather than persisting in this inert approach, the CBN and the government should focus on enhancing the economy's supply side. The spotlight must now be on supply-side policies, reshaping the government's actions to curb the inflation rate effectively. This transition in policy emphasis recognizes the need to address the root causes of inflation by bolstering the productive capacity and efficiency of the economy from a supply perspective.

Energy costs contribute significantly to rising prices. So, how can the government ensure a reduction in energy costs? Transportation costs have been a critical factor in driving inflation in recent months. This factor even has a more permanent effect on inflation. So, what should be done to reduce the cost of transportation? Also, insecurity has led to declining agricultural activities, reducing agricultural output. How can the government ensure that it overcomes the security challenges in the country?

The government's proactive approach to addressing these fundamental issues is the key to mitigating inflation. By posing critical questions and actively seeking solutions, the government can pave the way for a reduction in inflationary pressures.

Adopting a proactive stance prioritising supply-side economic policies is indispensable for tackling the root causes of Nigeria's current inflationary challenges. This strategic shift towards a more comprehensive and forward-looking economic policy can significantly stabilise the economic landscape of Nigeria.