Analysis: Really, is there anything the CBN can do to stop the current inflation? [HINT – NO]

by Tunji Andrews

July’s Consumer Price Index (CPI) report, which posted an 8.3% rise (YoY) in inflation in Nigeria, happens to be the fifth consecutive month of year-on-year increases in the Headline Index. A persistent increase that has found its roots with the increase in food prices that has been attributed to drought and insurgency in the North-Eastern parts of the nation. The report showed price increases in the Alcoholic, Beverages, Tobacco, Kola categories, with clothing & Footwear, Housing Water, Electricity, Gas & Other Fuel classes also rising. However, the highest price increases were recorded in the Fruits, Meats, Fish, classes, followed by the Potatoes, Yam and Other Tubers groups. What this essentially means is that, as the insurgencies persists and food prices continue to increase, we can expect that the inflation figures will continue to rise with it.

The default stance to controlling inflation in Nigeria, which has been historically triggered by high levels of liquidity, has always been to use monetary policy to tighten liquidity flows, by increasing rates (CRR: Public and Private) and the interest rate (MPR). Many would recall how the MPC under former governor Sanusi Lamido Sanusi, increased MPR from 8% – 12%, and public sector Cash Reserve Ratio (CRR) from 12% to 50% and then to 75%. This tightening did produce results as inflation figures were reduced to single digits, with the CBN/MPC setting a 4% inflation target for 2016.

The current wave of inflation first hit the price of foodstuff because a lot of the areas that produce in Nigeria, are threatened by Boko Haram.
The current wave of inflation first hit the price of foodstuff because a lot of the areas that produce in Nigeria, are threatened by Boko Haram.

Inflation, a result of sustained increase in the general level of prices for goods and services, measured as an annual percentage increase. For citizens, by inflation rising, every Naira owned buys a smaller percentage of a good or service. The value of money, which is judged by its purchasing power, which does not stay constant due to inflation, is a consistent factor that erodes the purchasing power of citizens. For example, if the inflation rate is 2% annually, then theoretically a N1 piece of gum will cost N1.02 in a year. After inflation, your Naira can’t buy the same goods it could beforehand. Once inflation sets in it is difficult to reduce it For example, higher prices will cause workers to demand higher wages causing a wage price spiral. Therefore, expectations of inflation is important.

Inflation however isn’t necessarily an evil thing, as it affects different people in different ways. It also depends on whether inflation is anticipated or unanticipated. If the inflation rate corresponds to what the majority of people are expecting (anticipated inflation), then it is possible to compensate by increasing or reducing cash flow (liquidity) and the cost isn’t high. For example, CBN can vary their interest rates as necessary.

The challenge here however is that we are yet to find a definitive solution to the North-Eastern security issues and as they persist, the country can not realistically plan for inflation. It may even push the monetary agency to look to tighten further in order to even-out the effects of food price hike. What this means is that as the CBN squeezes banks via a rate hike, the banks would in turn squeeze customers, who already would have began to feel the effects of less liquidity on their cash flow.

This however would still remain a quick fix and in the long term, should this persist, fiscal policy may be a more appropriate approach to fix this month-on-month inflation rise. Realistically, the fix of this current rise, lies more with the federal government moving to squash the insurgency, than with the CBN.

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