How rising fuel price, naira crisis drove inflation spike in September

• The National Bureau of Statistics (NBS) said the inflation rate rose to 32.70 per cent in September 2024 after two months of decline
• The dual factors of increasing fuel prices and the naira crisis contributed to the rise in the inflation rate
• Market watchers and analysts say the inflationary trend erodes the profit margins of investors and manufacturers. 

The National Bureau of Statistics (NBS), in its Consumer Price Index (CPI) report released on Tuesday, October 15, said Nigeria’s inflation rate rose by 0.55 per cent to 32.70 per cent from the 32.15 per cent recorded in August after two consecutive months of decline.

On a year-on-year basis, the September 2024 inflation rate is 5.98 percentage points higher than the rate recorded in September 2023, which was 26.72 per cent. 

According to the NBS, the headline inflation for the month is attributable to increases in transportation costs and food prices recorded in September. It said the increases affected food and non-alcoholic beverages by 16.94 per cent, housing, water, electricity, gas and other fuel by 5.47 per cent, clothing and footwear by 2.50 per cent, transport by 2.13 per cent, furnishings and household equipment and maintenance by 1.64 per cent, education by 1.29 per cent and health by 0.98 per cent.

Food inflation increased too

In the food sub-index, the NBS reported that the food inflation rate in September 2024 was 37.77 per cent on a year-on-year basis, which is 7.13 per cent points higher than the 30.64 per cent recorded in September 2023. 

On a month-on-month basis, the food inflation rate in September 2024 increased to 37.77 per cent from 37.52 per cent in August 2024, a 0.25 per cent increase compared to the rate recorded in August 2024.

According to the NBS, the rise in food inflation is due to the rate of increase in the average prices of beer (local and foreign) (tobacco class), vegetable oil, groundnut oil, palm oil, etc. (oil and fats class), beef, gizzard, dried beef, etc. (meat class), Lipton, Milo, Bournvita, etc. (coffee, tea, and cocoa class), and milk, egg, etc. (milk, cheese, and eggs class).

Fuel and the naira crisis are significant contributors to the inflation rate increase

Since President Bola Tinubu announced the removal of fuel subsidy on May 29, 2023, and the floating of the naira in June 2023, the economy has taken a hit, with prices of goods and services experiencing exponential increases.

The removal of subsidy on fuel, which the Group Chief Executive Officer of the Nigerian National Petroleum Corporation Limited (NNPCL), Mele Kyari, said gave petrol smugglers around N17 million per truck supplied to neighbouring countries, was the first signal of the deregulation of the petroleum sector.

Since the removal of the fuel subsidy, the price of the product has maintained an upward trajectory from an average of N238.11 in May 2023 to over N1,000 in October 2024. The NNPCL recently announced the latest hike in fuel price, the second time in two months, with prices now approximately N998 in Lagos from N885 and N1,030 in Abuja from N897.

In addition to the price hike, the product has become scarce, resulting in long queues in petrol stations in major cities across the country.

The naira crisis that followed the floating of the local currency, allowing for market forces to determine its value on a willing-buyer-willing-seller model, is another contributor to the rise in the inflation rate.

The naira has been on a downward trend, depreciating by 40 per cent in the first half (H1) of 2024 and judged the worst-performing currency in H1 2024. The depreciation has continued as the currency lost 43 per cent of its value and is one of the worst-performing currencies on the African continent, according to the latest Africa’s Pulse report by the World Bank.

The currency has seen exponential increases, jumping from the N769.25/$ it traded on June 30, 2023, at the Investors and Exporters (I&E) window and N770/$ at the parallel market to N1,658.97/$ as of October 14, 2024. At the parallel market, the loss is higher as the naira opened at N1,630.35/$, oscillated between N1,636.62/$ and N1,630.35/$ and settled at N1,634.66/$ as of October 14, 2024.

Market watchers react to rising inflation rate

The inflation rate figures have elicited reactions from market watchers, who said the rising inflationary trend is eroding the profit margins of investors and manufacturers. 

The Centre for the Promotion of Private Enterprise (CPPE), in a statement signed by its Director/CEO, Dr Muda Yusuf, said that the surge in petrol prices has further exacerbated the situation and called on the government to address the root causes of inflation.

Dr Yusuf said, “The reality is that the dynamics driving inflation are yet to be effectively subdued. These factors include the depreciating exchange rate, surging fuel price, rising transportation costs, logistics and supply chain challenges, high energy cost, climate change including resultant incidents of flooding, insecurity in farming communities and structural bottlenecks to production.  

“These are largely supply-side issues. There is also the factor of seasonality of agricultural outputs, which activates seasonal price surges in some food crops. Elevated inflationary pressures escalate production costs, weaken profitability and dampen investors’ confidence. 

“Not many investors can transfer cost increases to their consumers. The implication is that manufacturers and other investors are taking a big hit resulting from erosion of profit margins as a result of consumer resistance and weak purchasing power.”

Dr Yusuf also advised the government to tackle the rising inflation by incentivising the real sector to reduce production costs and offer concessionary import duty on intermediate products for industrialists, among others.

He said, “Tackling inflation requires urgent government intervention to address the challenges inhibiting production, productivity and security in the economy. The real sector of the economy needs to be incentivised to reduce production costs.  

“The government needs to offer concessionary import duty on intermediate products for industrialists. The effects of high energy costs and exchange rates on inflation is quite significant. 

“It will be very difficult to tame inflation if we do not substantially fix power, logistics and forex and security issues.  

“Regrettably, there are no quick fixes in these areas. But, it is important to prioritise these issues and drive accelerated progress with the right strategies. Hopefully, the proposed economic stabilisation measures embodied in a bill currently before the National Assembly would substantially address these concerns from the fiscal side.”

Beyond increasing MPR, how else can CBN tame inflation?

Meanwhile, TheRadar reported that at its 296th Monetary Policy Committee (MPC) meeting, the Central Bank of Nigeria (CBN) increased the Monetary Policy Rate (MPR) by 50 basis points to 26.75 per cent from the May rate of 26.25 per cent to tame inflation.

TheRadar highlighted other ways the apex bank can tackle inflation beyond increasing interest rates, which some Nigerians describe as ‘textbook economics.’