The National Bureau of Statistics (NBS) recently released details of its planned rebasing of the data used for computing Nigeria’s inflation rate.
This announcement has sparked discussions about how the new methodology might reshape our understanding of inflation trends in the country.
Nigeria’s inflation rate, like in most other countries, is calculated by determining the percentage difference between the Consumer Price Index (CPI) in one period and another—typically year-over-year or month-over-month.
The CPI itself is derived from a basket of goods and services, with prices measured periodically through extensive surveys across the country.
After gathering data, the various sub-indexes are updated with the new prices, and weighting is applied to reflect their relative importance in consumer spending patterns.
Why weighting is critical
The weighting of sub-indexes in the CPI is crucial to determining the inflation rate.
For instance, consider two items: Food and Cars. If their respective price indexes in January 2023 are 1,200 and 1,400, and by January 2024 these indexes increase to 1,580 and 1,610, it means their prices have risen by 31.7% and 15%, respectively.
To compute the combined rate of change in the CPI for both items, their respective weightings must be applied.
For example:
- If Food has a weighting of 80% and Cars 20%, the inflation rate will be 27.9%.
- If the weighting changes to 60% for Food and 40% for Cars, the inflation rate drops to 24.4%.
- If the weighting is reduced further to 30% for Food and increased to 70% for Cars, the inflation rate falls to 19.5%.
This demonstrates that the weightings assigned to components of the CPI significantly impact the overall inflation rate.
What is rebasing
Rebasing the CPI for inflation purposes involves updating the relative importance (weights) of different items in the Consumer Price Index to align with current spending patterns and economic realities. Over time, consumer preferences and spending habits change, and the CPI must reflect these shifts to remain accurate.
For example, if households now spend more on housing and less on transportation, rebasing adjusts the weights to capture this change. After rebasing, inflation is calculated based on the percentage change in the total CPI, using the updated weights for each category of goods and services.
In simple terms, rebasing is like giving more importance to what people buy more of today and less to what they buy less of, ensuring inflation measurements are accurate and relevant to modern consumer behavior.
What the NBS wants to do
In its latest release, the NBS announced that 2019 would serve as the new base year for its CPI rebasing exercise.
This decision was influenced by the economic distortions caused by the COVID-19 pandemic in 2020 and 2021, as well as the uncertainty and instability of 2022–2024.
Under the new framework, the NBS has adjusted the weights applied to various sub-indexes, reflecting changes in consumer spending patterns.
While the sub-index items remain largely unchanged, the NBS introduced “Insurance and Financial Services” as a new sub-index.
The most notable changes include a sharp reduction in the weighting of Food & Non-Alcoholic Beverages from 51.8% to 40.1% and a significant increase in the weighting of Restaurant & Hotels from 1.2% to 12.9%.
Using the new weights, we recomputed the inflation rate for November 2024, assuming the same CPI figures as previously reported. Our model excluded the newly added “Insurance and Financial Services” sub-index due to the lack of historical data.
What we arrived at
The result of this recalculation indicates a 33.8% inflation rate, which is slightly lower than the prior inflation rate of 34.6% calculated using the old weights.
This difference highlights how the rebalancing of weights impacts the final inflation figure. Under the old methodology, where Food & Non-Alcoholic Beverages carried a higher weighting of 51.8%, the overall inflation rate was more influenced by changes in food prices.
In contrast, the reduced weighting for food in the new structure (40.1%) and the increased weighting for categories like Restaurants & Hotels (12.9%) reflect a shift in focus. This adjustment tempers the influence of food prices, which tend to rise consistently but more moderately while amplifying the role of sectors like hospitality, where price fluctuations can be sharper and more seasonal.
What this means
The result of this recalculation indicates a 33.8% inflation rate, slightly lower than the prior inflation rate of 34.6% calculated using the old weights. This difference highlights how the new weighting shifts the influence of certain sectors on inflation.
- For instance, the reduced weighting for Food & Non-Alcoholic Beverages from 51.8% to 40.1% tempers its impact, while the increased weighting for Restaurants & Hotels (from 1.2% to 12.9%) amplifies the contribution of hospitality services.
- Additionally, other sectors with increased weightings, such as Transport (6.5% to 10.7%), Health (3.0% to 6.1%), and Communication (0.7% to 3.3%), now play a much larger role. This recalibration makes the inflation rate more sensitive to price changes in these service-based sectors.
- For example, fluctuations in fuel prices will now have a greater impact on overall inflation due to the higher weighting for transport. Similarly, rising medical costs and telecom tariffs will reflect more prominently in inflation data.
These changes highlight the evolving spending patterns of Nigerian households, as services like healthcare, education, and communication become more integral to their budgets. While the rebasing provides a more accurate picture of contemporary consumption, it also introduces new dynamics. The higher weightings for volatile sectors like transport and hospitality could result in more fluctuation in inflation rates moving forward.
