Global economists are struggling with differentiating between the features of the current inflation trend. Whilst the Fed insists that the recent inflation looked more transient, some others like Larry Summers believes that the wage increase and stimulus package may lead to a more protracted inflation spiral. In Nigeria, current inflation is driven by a number of factors – some structural and some transient.
- Money supply growth (M2): Theoretically, money supply growth is a fundamental driver of inflation especially in the short run. However, in the long term, it unlocks unemployed resources. Broad money supply jumped by 20.09% to N38.38trn in April 2021 from N31.96trn in April 2020 and is projected to increase towards N40trn in June.
- Fiscal deficit: Economists are of the opinion that an increase in fiscal deficit could fuel inflationary pressures. This is because increased government borrowing especially through ways and means advances would boost liquidity and exert inflationary pressures.
- Exchange rate pass-through effect: Imported inflation has remained high due to currency pressures. In recent times, the blend between official and autonomous rate has improved to 20:80 from 10:90. This is expected to reduce the average blended rate to N450-460/$ from N476/$ in Jan’21, pointing to a possible reduction in import costs.
- Insecurity: Insecurity has been a major disruptor to the commodities value chain. Our market survey revealed that commodities with the highest price increases are grown in the North. In the last 5 months, the price of beans increased by almost 50%, tomatoes jumped by 285% while pepper surged by 300%. The Onion Producers and Marketers Association of Nigeria has threatened to stop the supply of onions to the South. This could push up the price of onions to over N40,000 per bag from its current price of N21,000.
- Higher energy costs: State governors have agreed to full deregulation of the downstream sector, which points to a possible increase in the price of PMS to N385/$ in the near term. Average petrol price increased to N165/litre in 2021 from N145/litre in 2020. Transport and logistics account for 6.51% of the inflation basket. Also, there is likely to be another electricity tariff hike in July.
