April inflation data reveal 5 alarming indicators

The latest inflation numbers for Nigeria in April 2023 have revealed deeply concerning trends that paint a gloomy picture for households and their purchasing power.

Nigeria’s inflation rate rose to 22.2% in April 2023, the highest since January 2004, 19 years ago. In fact, Nigeria has posted a record inflation rate every month since July 2022. It is as if we hit new record highs every month that inflation numbers are published.

The highest increases were recorded in prices of gas, air transport, liquid fuel, vehicle spare parts, fuels, and lubricants for personal transport equipment, medical services, and road transport.

The contributions of items on the divisional level to the increase in the headline index are; food and non-alcoholic beverages (11.51%), housing water, electricity, gas, and other fuel (3.72%), clothing and footwear (1.7%), and transport (1.45%).

Parsing through the latest inflation data we observed 5 alarming indicators that suggest Nigeria’s inflation rate could remain sticky for a very long time. Whilst the inflation rate can continue to rise economists often observe several other indicators within the consumer price index to gauge if the inflation rate will likely fall in the long term even if it appears high in the short term.

A set of indicators contained in the latest report suggest things might actually be going from a really bad case to worse. These are some of the indicators.

Monthly Inflation Soars to the Highest Level since 2016

April witnessed a significant surge in month-on-month inflation, reaching its highest level since 2016. May inflation rate printed at 1.9% the highest since May 2016 when it was 2.8%

• When the inflation rate rises at its fastest month-on-month, it indicates a significant and rapid increase in prices within a short span of time.
• This places an immense strain on households, making it increasingly challenging for them to afford everyday essentials.
• As the cost of living continues to rise, families may find themselves struggling to meet their basic needs, jeopardizing their quality of life and overall well-being.

Year-on-Year Inflation Reaches a 17-Year High

The year-on-year inflation rate for April 2023 stands at its highest level in over 17 years, indicating a prolonged period of escalating prices.

• Such sustained inflationary pressure has far-reaching consequences for households, hindering their ability to plan for the future and undermining their financial stability.
• Nigerian families face the risk of diminished purchasing power, reduced savings, and limited opportunities for economic growth.
• It is likely that commercial banks will increase interest rates just to keep up with the rising inflation rate. Most companies will also raise the cost of goods and services just to remain above water.

Core Inflation Surpasses the 20% Threshold

April marked a grim milestone as core inflation finally crossed the 20% threshold psychologically for price-conscious small businesses.

• Core inflation encompasses essential goods and services such as housing, education, and healthcare, which form the backbone of household budgets.
• This alarming development underscores the broad-based nature of price increases across various sectors of the economy.
• As core inflation continues its upward trajectory, Nigerian families will experience a steady erosion of their purchasing power, intensifying financial hardships.

Food Inflation Reaches Unprecedented Heights

One of the most distressing trends observed in April is the unprecedented level of food inflation.

• Soaring food prices have severe implications for households, particularly the most vulnerable segments of the population.
• Access to a nutritious diet becomes increasingly challenging as essential food items become prohibitively expensive.
• Rising food inflation heightens the risk of food insecurity, malnutrition, and a decline in the overall health and well-being of Nigerian families.

Escalating Costs of Food and Non-Alcoholic Beverages

Within the realm of food inflation, the category of food and non-alcoholic beverage prices is of particular concern as it rose by 24.5%

• This indicator highlights the rising costs of staple food items that constitute a significant portion of household consumption.
• As prices of grains, meat, vegetables, and other essentials skyrocket, families are confronted with the agonizing reality of compromised meals and nutritional deficiencies.
• The burden of making ends meet is exacerbated as households are forced to allocate a growing portion of their budget solely to sustenance.

What this means

Overall, these indicators suggest the policies of the central bank, which have been considered aggressive are not bringing down inflation fast enough. The money supply is still at an all-time high and the reintroduction of old currency into circulation will likely exacerbate things.

• Rapidly rising inflation can have repercussions on various types of investments. Fixed-income investments, such as bonds, may experience diminished real returns as the inflation rate outpaces the interest earned.
• Similarly, the value of cash holdings erodes in real terms, prompting individuals to seek alternative investment options to preserve their wealth and hedge against inflation.
• A fast increase in the inflation rate can create uncertainty in the economy. Businesses may struggle to predict and plan for future costs, making it challenging to set prices or budget effectively.
• Similarly, individuals may find it difficult to plan their financial goals and make long-term decisions, as the rapidly changing inflation environment adds uncertainty to their financial calculations.

We expect the central bank to jack up MPR when it means later and might consider other policy actions aimed at forcing down inflation.