By global standards, Nigeria’s inflation rate is an economic wrecking ball. While Europe and the United States of America (USA) have seen inflation rates slide on monetary tightening, Nigeria’s monetary authorities have seen the exact opposite. While the US saw inflation rise to over 10% at the beginning of 2023, tight monetary policy led to a sustained reduction, with headline inflation falling to 3.4% in December 2023 (a rise from 3.1% in November). A similar story played out in the United Kingdom, where headline inflation of 10.7% in January 2023 fell to 4% by December (up from 3.9% in November, the first time the inflation rate had increased since February 2023).
Nigeria’s inflation rate, on the other hand, rose steadily throughout 2023 despite the Central Bank of Nigeria’s (CBN’s) repeated upward monetary policy rate (MPR) interventions. Inflation rose from roughly 15% in January 2023 to 28.82% by December, chucking dirt in the eyes of CBN hawks utterly perplexed by the consistent rise in the average consumer price index (CPI). Why has Nigeria’s inflation rate defied policy rate hikes?
The inability of the CBN’s MPR to curb inflation pressures reflects a few inconvenient truths. Proshare’s economists argue that:
- The MPR is not a competent tool for tightening monetary policy.
- The best way to cut demand for money is by raising the banks’ cash reserve ratio (CRR), but at 32.5%, it is already the highest in the world. The CBN has used discretionary CRR and the statutory CRR to curb inflation, but this has only led to banks grossing up interest rates and engaging in credit rationing.
- Three-quarters of domestic Nigerian inflation can be attributed to a declining exchange rate, meaning that to bring down inflation, the authorities need to raise the exchange value of the naira.
- Supply-side constraints related to high import costs have made rising domestic commodity prices endemic. The outlook for fast-moving consumer goods (FMCGs) in 2024 is dim. The country’s high import dependency feeds into a high domestic cost narrative. Few commodities will avoid the rising price whiplash.
Nigeria’s recent 28.92% headline inflation rate represents the thirteenth straight month of a rise in average domestic prices despite a persistent increase in CBN’s MPR. The December headline inflation represents a 7.58% increase in inflation compared to the 21.34% recorded in December 2022, while monthly inflation grew by 0.72% points on a month-on-month (M-o-M) basis when compared to the 28.20% inflation rate recorded in October 2023. The current inflation growth brings Nigeria’s average inflation to 24.52%, representing a 5.75% rise from the 18.77% average inflation recorded for 2022. Core inflation, on the other hand, rose to 23.06% in December 2023, growing by 4.85% points from 18.21% recorded in a similar period in 2022 and 0.68% points from 22.38% in November 2023 on month-on-month (M-o-M). (See chart below)
Chart 1:
Key highlights of the December 2023 Inflation report
- Year-on-Year (Y-o-Y), Headline inflation rose by 7.58% points to 28.92% in December 2023 from 21.34% recorded in December 2022.
- Month-on-month (M-o-M), inflation rose by 0.72%, from 28.20% in November 2023 to 28.92% in December 2023.
- Y-o-Y, Core inflation rose from 18.21% in December 2022 to 23.06% in December 2023.
- Inflation remains higher in urban areas at 31.00% in December 2023 from 22.01% in December 2022 than in rural areas at 27.10% in December 2023 from 20.72% in December 2022.
- M-o-M Core Inflation rose to 23.06% in December 2023 from 18.21% in December 2023.
- Food inflation rose by 10.17% to 33.93% in December 2023 from 23.75% recorded in December 2022. This also represents a 1.08% increase compared to the 32.84% food inflation recorded in November 2023.
- Kogi state had the highest inflation growth at 35.58% in December 2023, an increase from 33.28% in November 2023, while Borno had the slowest inflation growth at 23.27%, a decline from 22.47% in November.
- Food inflation growth was highest in Kogi at 44.73% in December 2023 from 41.29% in November 2023 and the slowest in Bauchi at 26.14% in December 2023 from 27.49% in November 2023.
Key Average Inflation Figures for 2023
- Inflation averaged 24.52% in 2023, representing a 9.75% increase from the 18.77% average inflation recorded in 2022.
- Core inflation averaged 20.68% in 2023 from 15.96% in 2022.
- Food inflation was the highest contributor, averaging 27.76% in 2023 from 15.96% in 2022.
Chart 2:
Key Inflation Insights Across Regions in Nigeria
Inflation was the highest in the southern part of Nigeria:
- The southwest region recorded the highest headline and food inflation in December 2023 at 33.59% and 30.74%, respectively.
- The South-South saw headline inflation at 37.19% and food inflation at 29.92% in December 2023.
- Insecurity and conflict saw the Northcentral region with the third highest headline and food inflation numbers in December 2023.
- The Northeast region had the lowest inflation rate, with headline inflation at 29.28%, while food inflation was at 27.05% in December 2023.
Chart 3:
Inflation Across Nigerian States
According to the NBS December 2023 inflation report, out of 36 states and FCT, headline inflation continues to be lower in the northern region of Nigeria than in the southern region. All 10 states with the lowest headline inflation in Nigeria come from the northern region, of which the top 5 states with the lowest inflation are Bornu (23.27%), Taraba (24.92%), Kastina (26.58%), Jigawa (26.58%), and Nasarawa (26.60%).
Except for Kogi and Bauchi states, the top ten states with the highest headline inflation in Nigeria in December 2023 come from the southern region of Nigeria. The top 5 states with the highest headline inflation include Kogi (35.58%), Lagos (32.16%), Rivers (32.16%), Bayelsa (32.04%) and Bauchi (31.55%).
The foregoing clearly indicates the high inflation rate in Nigeria and the depleting purchasing power of businesses and households as inflation across all states in Nigeria stands above 23.27%, the minimum observed headline inflation in Bornu state (see illustration below).
Illustration 1
The report showed high food inflation across the country. Out of 36 states and the FCT, food inflation remained high but was lower in the north than in the south.
All ten states with the lowest food inflation figures came from the north, of which the top 5 states were Bauchi (27.49%), Jigawa (27.98%), Katsina (26.58%), Jigawa (26.58%), and Nasarawa (26.60%). The top 5 states with the highest food inflation included Kogi (44.73%), Kwara (41.33%), Imo (39.54%), Lagos (39.35%), and Ekiti (38.97%) (see illustration below).
Illustration 2:
Drivers of inflation in December 2023
According to the NBS report, the key drivers of inflation are food, transport, imports, and energy. These factors unfolded against the backdrop of other factors, such as the depreciating exchange rate of the naira to the dollar, averaging N897.30/$ in December 2023 compared to N832.57/$ in November 2023 and N450.82/$ in December 2022 in the official market. Increased money supply, increased money supply from N67.18trn to N65.7trn given CBN data as of December 29, 2023, insecurity has contributed to declining agricultural output (see chart below).
Chart 4:
Analysts’ Thoughts on a Targeting Illusion
An Olayemi Cardoso-led Central Bank has noted that inflation-targeting and foreign exchange stability would remain its focus. The Bank’s Monetary policy approaches include sourcing additional foreign exchange to stabilise the naira and strengthen foreign reserves. The CBN also resumed its open market operations (OMO) auction in September, which continued through December 2023 at
While the move to mop up liquidity was important, the policy direction and actions of the regulator have emphasized the need to curb inflation. The current 18.75% monetary policy rate (MPR) has been left unchanged since the governor of the CBN assumed office in September 2023 despite rising inflation, which stood at 26.72% in September 2023 and rose to 28.92% in December 2023. Analysts note that, the structure the CBN has adopted in tackling Nigeria’s surging inflation seems unclear as the CBN still operates without a monetary policy board since September 2023.
Therefore, the inflation targeting approach adopted by the CBN might be an illusion as moves by the Cardoso school of thought at the CBN are yet to yield counter-inflationary results for now. The foreign exchange burden continues to hit hard on the economy. Insecurity, energy, and low productivity concerns also remain key risks driving inflation, implying that inflation is not merely driven by high economic liquidity that needs to be mopped up. Some analysts have mooted that policy rate hikes may remain counterproductive and inadequate in stabilising the economy.
Analysts have, therefore, recommended adopting a ‘beyond interest rate policy approach’ to inflation containment. The economists argue for the need to improve FX liquidity and the ‘financialisation’ of the national balance sheet (idle public assets) to support fiscal liquidity. In stopping the inflation-wreaking ball, policymakers need to switch off the money supply engine and turn the asset intermediation key.
