Nigeria’s inflation overshoots to near-two-decade high in July

Sopuruchi Onwuka

Nigeria’s inflation on global ratings jumped by 1.3 percent in one month to reach troubling 24.1 percent just one month after the new government of President Bola Tinubu came into office and pulled all the price triggers in the market.

By removing subsidy on petrol, devaluing the Naira and increasing workers’ pay, the new president activated inflationary trends in the already weakened economy.

Independent figures aggregated by Focus Economics showed that inflation jumped from 22.8 percent in June when the new policies came into effect to 24.1 percent at the end of July.

“July’s reading was the highest since September 2005. The print, which overshot market expectations of a 23.6% rise, was nearly three times higher than the upper bound of the Central Bank of Nigeria’s 6.0–9.0% target band,” the data based analytics declared in a latest report on Nigeria.

Meanwhile, the Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) narrowed the interest rate corridor to +100/-300 basis points around the key rate from +100/-700 basis points, posting cumulative increase of 725 basis points since May 2022.

In between, the Purchasing Managers’ Index (PMI)—produced by Stanbic IBTC Bank and S&P Global—showed a moderating improvement in sector operating conditions compared to the previous month.

According to the reports on Nigeria analyzed by The Oracle Today, food prices drove inflationary acceleration in the July, followed by sharp rise in the cost of transportation and steep plunge in the value of the Naira.

“Looking at the details of the release, the acceleration was primarily due to prices for food—which accounts for the lion’s share of the inflation basket—rising at a steeper rate. In addition, price pressures for transportation grew at a quicker pace. This was partly the result of the scrapping of the costly fuel subsidy in late May, which led to a tripling of petrol prices. Moreover, President Tinubu ended restrictions on foreign exchange trading in June, leading the naira to plunge over 40% against the U.S. dollar in the same month and hit a record low in the parallel market, fueling inflation further,” Focus Economics reported.

It added that consumer prices rose 2.89% from the previous month in July, picking up from June’s 2.13% rise. July’s result was the highest reading since January 2012.

“Recently deployed reforms will continue to ignite inflation in the short term, exacerbating the country’s cost-of-living crisis. The Central Bank has already hiked rates to their highest level in nearly 20 years, and recently released data could prompt it to extend its longest policy tightening cycle in years and deliver its ninth consecutive rate hike at its next meeting set for 25–26 September,” the analysts stated.

At its first meeting ended July 25 under Acting Governor Folashodun Shonubi, the Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) raised the key rate to 18.75% from 18.50%. The Bank also narrowed the interest rate corridor to +100/-300 basis points around the key rate from +100/-700 basis points.

The move, analysts said, was below market expectations and ran counter to President Tinubu’s pledge for lower interest rates while the increase was the smallest in the current tightening cycle, “which has seen a cumulative increase of 725 basis points since May 2022.”

The CBN pointed to the persistent rise in inflation over recent months and its negative impact on the domestic economy as the main motivating factors for the hike.

In addition, committee members feared that the removal of fuel subsidies in late May and the exchange rate liberalization in mid-June which caused a sharp depreciation of the naira would exacerbate inflation in the coming months.

“The Bank’s smaller hike points to a reduced appetite for large hikes going forward. Nonetheless, our panelists see the Bank hiking again in upcoming meetings to tackle accelerating inflation” the analysts stated.

The Oracle Today reports that the CBN’s Monetary Policy Committee (MPC) is scheduled to meet again on September 25.

On its own, the Economic Intelligence Unit (EIU) commented on the outlook, saying that the CBN must adopt proactive agenda setting for the economy and drive a sustained aggressive tightening of interest rates instead of reacting to economy information.

 “We view the MPC’s decision as an indication that the CBN will continue to react to economic information, rather than being proactive in setting expectations. Because Nigeria’s financial sector is relatively small—private-sector credit extension is about 20% of GDP—controlling inflation through the interest-rate channel requires aggressive tightening for lengthy periods.

“Hence the CBN has missed an opportunity to get ahead of inflationary forces on the immediate horizon. […] The next sitting in September will be the acid test of how the CBN reacts to higher inflation, but a dovish bent among committee members also cements our expectation of negative real interest rates throughout the 2023-27 forecast period,” the EIU declared in the report posted by Focus Economics.

Meanwhile the PMI fell to 51.7 in July from June’s 53.2. Consequently, the index remained above the 50.0 no-change mark, pointing to a moderating improvement in sector operating conditions compared to the previous month.

“July’s print marked the second consecutive decline and was also caused by stronger inflation due to the government’s removal of fuel subsidies in late May and a weaker naira, following the Central Bank’s decision to reduce interventions in FX markets in June.

“Against this backdrop, input costs rose at the joint-fastest pace on record, which prompted firms to increase their output charges at a sharp rate. Consequently, new orders and output growth slowed down, while sentiment among manufacturers fell to an all-time low. On the flip side, firms expanded their headcounts for the third consecutive month and increased their purchasing activity,” the report stated.