The Central Bank of Nigeria has once again blamed the rising food inflation on supply-related issues, shifting the blame away from its monetary policy.
The latest data from the National Bureau of Statistics (NBS) reveals that the inflation rate for the month of October rose to 14.23% year on year. Food inflation, a major component of Nigeria’s inflation rate, rose by 17.38% year on year, underpinning the high cost of food suffered by millions of Nigerians.
Reasons for high food inflation
The central bank in its monetary policy committee meeting held in September identified the rising food inflation and blamed it on factors that are beyond its control. The latest MPC release contains the personal statements of the members.
The increase in headline inflation was largely driven by the persistent increase in the food component, which rose to 16.00% in August 2020, from 15.48% in July 2020. The core component also rose to 10.52% in August from 10.10 per cent in July 2020.
These upticks were driven primarily by legacy structural factors, such as the inadequate state of critical infrastructure and broad-based security challenges across the country, which dampened production activities. Other factors include the disruptions to supply chains, following restrictions to movements to curb the spread of the pandemic; adverse weather conditions, which resulted in the flooding of farmlands; as well as the inflation pass-through to domestic prices, following the depreciation in the exchange rate.
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The recent increase in energy cost is also expected to further impact the domestic price level in the short-term.
What this means: By dumping inflation targeting from the demand side, the CBN is simply betting that spending money on stimulus programs will pay off down the road, as cheaper long-term credit will reduce the cost of goods and services and will eventually reflect in the lower inflation rate.
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- The CBN did not state where it sees the inflation rate and when it will drop to its new target by relying on supply-side management as a strategy.
- The CBN claims it has spent about N3.5 trillion on several stimulus programs since Covid-19 broke in the first quarter of the year. However, the inflation rate continues to gallop, eroding the purchasing power of ordinary Nigerians.
- The downside of this strategy is that there is very little impetus for foreign investors to purchase CBN securities at very low-interest rates.
- This shuts the door to the reliance of foreign portfolio inflows to shore up dollar reserves, leaving us with investors who may want to return to the stock market.
What to expect: If oil prices fail to pick up and foreign investor inflow is not forthcoming, there will likely be heavy pressure on the CBN, effectively worsening things.