Price crises worsen inflation, rate soars to 21%

Ilesanmi AdekanbiOctober 10, 2022

4 minutes read

Low domestic production, declining naira value and global economic dislocations are pushing the cost of basic food items beyond the reach of average Nigerians.

Economic and financial experts say the price crises have worsened in recent times as the inflation rate continues to rise.

The inflation rate, which surged to 20.52 per cent in August, the highest in 17 years, is expected to reach a new high at about 21 per cent. It was 19.64 per cent in July 2022.

All economic and financial analysts polled yesterday by The Nation were unanimous that their independent surveys had shown a further increase in the inflation rate, with analysts’ predictions indicating a possible increase ranging from 40 to 70 basis points. The NBS is expected to formally announce the September inflation rate on October 15.

Bismarck Rewane’s Financial Derivatives Company (FDC) said it expected the inflation rate to rise by nearly 40 basis points from 20.52 per cent in August 2022 to 20.9 per cent in September.

Cordros Capital said that with the existing lingering challenges impeding food production and supply, the Consumer Price Index (CPI) will likely increase further by 66 basis points to 21.18 per cent when the September figures.

Afrinvest (West Africa) estimated that the inflation rate will rise by 60 basis points to 21.1 per cent.

According to FDC, a survey of major markets in the Lagos Metropolis and a time series model showed continuing increase in headline inflation, although the pace of price increase is slowing, which might suggest that the price inflation may be approaching a point of inflection.

The FDC said: “Our study also indicates that there will be an increase in both the annual food-23.9 per cent and core -17.78 per cent sub-indices. The major causative factors propping up the price level remain the usual suspects, that is, weaker domestic currency at N732 per dollar, higher logistics costs and excess liquidity.”

Analysts noted that inflation is driven more by the transmission effect of foreign exchange (forex) scarcity on prices and the high cost of energy.

According to the FDC, “in the last month, the naira has depreciated by 3.97 per cent in the parallel market. It traded at N704 per dollar at the beginning of September to N732 per dollar this week.

“However, due to a possible long outside lag-the amount of time it takes for government’s policy to have a noticeable effect on the economy, the impact of the current MPC policy rates hike might not have an immediate effect.

“This suggests that inflationary pressures loom, and would still continue in the next quarter, especially with the elevated price of diesel and other sources of energy. However, we expect the monetary policy committee to maintain the status quo in its next meeting.”

However, they pointed out that the surge in inflation is not specific to Nigeria alone but also across Sub-Saharan Africa (SSA) noting that while the intensity of the inflationary pressure varies, energy costs and currency weakness seem common causative factors to all.

“We expect price pressures to be sustained across the food and non-food baskets in the short term,” Cordros Capital said.

Providing insight into the effects and causes of inflation, global management consulting firm, McKinsey & Company, said inflation is the gradual loss of purchasing power, reflected in a broad rise in prices for goods and services.

“Inflation refers to a broad rise in the prices of goods and services across the economy over time, eroding purchasing power for both consumers and businesses,” McKinsey & Company stated.

It explained that the naira, for instance, “will not go as far today as it did yesterday”. To understand the effects of inflation, take a commonly consumed item and compare its price from one period with another.

“That’s inflation, and it isn’t limited to price spikes for any single item or service; it refers to increases in prices across a sector, such as retail or automotive—and, ultimately, a country’s economy,” McKinsey & Company noted.

The report explained that inflation affects consumers most directly, but businesses can also feel the impact, pointing out that while households, or consumers, lose purchasing power when the prices of items they buy, such as food, utilities, and gasoline, increase; companies lose purchasing power, and risk seeing their margins decline, when prices increase for inputs used in production, such as raw materials like coal and crude oil, intermediate products such as flour and steel, and finished machinery.

In response, companies typically raise the prices of their products or services to offset inflation, pushing the increases for consumers to absorb.

Statistical agencies measure inflation by first determining the current value of a “basket” of various goods and services consumed by households, referred to as a price index. To calculate the rate of inflation, or percentage change, over time, agencies compare the value of the index over one period to another, such as month to month, which gives a monthly rate of inflation, or year to year, which gives an annual rate of inflation.

McKinsey & Company explained that there were two primary causes of inflation-demand-pull inflation, which occurs when the demand for goods and services in the economy exceeds the economy’s ability to produce them; and cost-push inflation, which occurs when the rising price of input goods and services increases the price of final goods and services.

“When inflation occurs, companies typically pay more for input materials. One way for companies to offset losses and maintain gross margins is by raising prices for consumers, but if price increases are not executed thoughtfully, companies can damage customer relationships, depress sales, and hurt margins,” McKinsey & Company stated.

Source: The Nation Newspaper