Food Prices Continue to Drive Nigeria’s Headline Inflation

It is no longer news that Nigeria's headline inflation on year- on- year basis declined for the first time since December 2022. According to the National Bureau of Statistics, it dropped to 33.40% in July 2024 from 34.19% in June 2024. It is no fluke as the month-on-month headline inflation declined consistently since March 2024, with June 2024 as an exception. It is important to note that inflation only started to decelerate after the Central Bank, at its first Monetary Policy Meeting of 2024, held on the 26th & 27th of February 2024, the benchmark interest rate, by 400 basis points from 18.75% to 22.75%. It made subsequent increases, as need arose. The benchmark interest rate is currently 26.75%.

Interestingly, from January to July 2024, food and non-alcoholic beverages inflation contributed to no less than 51.8% of the headline inflation on a year-on-year basis. In July 2024, it contributed to 17.3% of the 33.4% headline inflation rate. The headline inflation rate was lowest in January when food inflation was also at its lowest. Therefore, reducing food inflation is key to the government’s long-term goal of driving inflation to single digit. It is not strait jacket as various factors, some of which are interwoven, have contributed to food inflation in Nigeria.

The rising cost of farming and transporting food commodities to the point of sale has affected the final price of food items. For example, the cost of animal feed, veterinary services, energy, fertilizer, seedlings, machinery & spares, and fuel has risen since the removal of the fuel subsidy and the floating of the naira by the government. Insecurity, which has caused many farmers to abandon their farmland, has led to a decrease in farm produce, causing shortages, especially during the dry season. This has encouraged hoarding and profiteering, with food prices skyrocketing. Food availability was also impacted by the increased demand for our farm produce from neighbouring countries as the devaluation of the naira, made them cheaper.

It is likely that in the immediate future, headline inflation will experience more decline but not necessarily on a straight-line basis, because the implementation of the new national policy is expected to increase household spending and raise the cost of producing/offering goods and services as employee wages increase. The Central Bank of Nigeria may be tempted to raise interest rates to slow demand and encourage savings. Also, with the harvest season commencing and the implementation of waivers on tariffs & duties on some essential imported food items, food prices are expected to drop. The recent mobilization of ten thousand agro-rangers by the Civil Defence Corps to secure farmlands across the country, if effective, is expected to encourage people to return to their farms and, in the long run, increase food production in the country. However, the recent fluctuation in the value of the Naira is likely to impact headline inflation in subsequent months.

While we celebrate the decline in headline inflation on a year-on-year basis and acknowledge government efforts in this regard, it is important to avoid a further decline in the value of the naira because of its multiplier effect. Improving the country’s revenue base and balance of trade by optimizing oil production and diversifying the economy will help achieve this. The government should also provide CNG trailers, lorries, and trucks to ease the cost of transportation farm produce. The government should continue to closely monitor events as they unfold and take proactive measures when needed. It should also adopt a robust monitoring and evaluation mechanism for its policies and programs to ensure objectives are met.