The purchase cost inflation in Nigeria reached a five-month high in August 2024, driven primarily by the continued depreciation of the naira.
According to the latest report released by Stanbic IBTC Bank Nigeria PMI, the surge in costs was attributed to rising prices of materials and transportation, exacerbated by the weakness in the naira.
The report highlighted that companies faced substantial input cost pressures, leading to an accelerated increase in output prices as businesses sought to pass these costs onto consumers.
It read: “Input costs rose rapidly again midway through the third quarter. The rate of purchase cost inflation hit a five-month high amid increases in prices for materials and transportation, with cost pressures exacerbated by currency weakness.
“Staff costs were also up as firms increased pay in response to higher living costs. Higher input costs were often passed on to customers, and output prices subsequently increased at the sharpest pace in five months.”
Businesses battle stagnation
The report, compiled by S&P Global from responses to a survey conducted among purchasing managers in the private sector, indicated that the purchasing managers’ index (PMI) ticked up slightly to 49.9 in August from 49.2 in July.
However, it remained below the 50.0 thresholds, signalling a continued deterioration in business conditions, albeit at a slower pace.
The report read: “The headline figure derived from the survey is the Purchasing Managers’ Index™ (PMI®). Readings above 50.0 signal an improvement in business conditions on the previous month, while readings below 50.0 show a deterioration.
“The headline PMI ticked up to 49.9 in August from 49.2 in July, but remained just below the 50.0 no-change mark and signalled a broadly stable picture for business conditions in the Nigerian private sector.”
The data pointed to a challenging operating environment for Nigerian businesses, particularly in managing rising costs against a backdrop of weak demand.
Rising material and transportation costs
One of the key findings of the report was the sharp rise in material and transportation costs, which played a significant role in the overall increase in purchase cost inflation.
Respondents to the survey noted substantial increases in prices for essential materials, particularly animal feed and paper, alongside higher logistics and transportation costs.
The escalation in costs was further aggravated by the persistent weakness in the USD/NGN exchange rate, making imports more expensive and adding to the inflationary pressures faced by businesses.
The report also highlighted that companies have started to cut back on purchasing activity in response to these cost pressures, leading to a reduction in stocks of inputs for the first time in 17 months.
This decline in inventories was one of the sharpest on record, excluding the months affected by the COVID-19 pandemic.
Despite the challenging conditions, firms remained cautiously optimistic about future output, with business expansion plans still in place, though sentiment was among the lowest recorded since the survey began.
Commenting, Muyiwa Oni, Head of Equity Research West Africa at Stanbic IBTC Bank, said: “The stagnation in overall operating conditions was in line with the trend in business activity; Nigerian companies posted a fractional reduction in business activity during August, as was the case in July
“Although a renewed expansion of sales led some companies to increase their output, others reported that demand remained weak amid marked cost pressures. Activity rose in the manufacturing and wholesale & retail categories but fell in agriculture and services. On purchase prices, respondents noted higher costs for materials, most notably animal feed and paper, while logistics and transportation were also a source of inflation amid higher fuel prices. Some panellists noted the weakness in the USD/NGN pair.
“The rate of output price inflation also quickened to a five-month high in August as just under half of all respondents signalled a rise in charges. The increase in output prices reflected the pass-through of higher costs to customers.”
What you should know
- The naira crashed by 1.76% against the dollar on the official NAFEM market in August 2024. The local currency moved from N1,570/$1 at the start of the month, to N1,598.56/$1 on the official market on August 30, 2024.
- However, this depreciation is mild compared to the 6.43% recorded in the previous month.
- Despite the mild decline, the data suggests a market under pressure, with the naira consistently depreciating against the dollar, reflecting underlying economic challenges, possibly including demand-supply imbalances in the foreign exchange market.
