Nigeria inflation cools in August: A short-lived respite?

Nigeria’s headline inflation dropped to 32.15 per cent from 33.40 per cent in July.
This marks a slight respite for Africa’s most populous nation, which has been battling relentless inflationary pressures for well over a year.
But the long-term outlook remains uncertain, as analysts warn that this reprieve could be short-lived.

Nigeria inflation cooled in August 2024, largely due to improved food supply driven by favorable weather conditions. According to the National Bureau of Statistics (NBS) update on Monday, the country’s headline inflation dropped to 32.15 per cent from 33.40 per cent in July. This marks a slight respite for Africa’s most populous nation, which has been battling relentless inflationary pressures for well over a year.

The relief in inflation was largely tied to falling food prices. As the harvest brought in abundant supplies of tomatoes, peppers, yams, and other staple foods, food inflation, a key driver of the overall figure, decreased to 37.52 per cent in August, down from 39.53 percent in the previous month. This decline follows July’s first notable slowdown in inflation in over 12 months, signaling a momentary pause in Nigeria’s unrelenting cost-of-living crisis.

“The drop in food inflation on a month-on-month basis can be attributed to improved food supply and the corresponding decrease in the rate of increase in the prices of tobacco, tea, coffee, groundnut oil, milk, and several tubers such as yam, irish potatoes, and cassava,” the NBS explained.

Relief for households as Nigeria inflation cools, but challenges loom

The August dip in inflation brought a sliver of hope to households that have struggled with rising costs for essential goods and services. But the long-term outlook remains uncertain, as analysts warn that this reprieve could be short-lived.

Several economic analysts have raised concerns that the recent decline might not signal the end of Nigeria’s inflation woes. The rise in food inflation on a year-on-year basis was still driven by increases in prices of bread, maize grains, yam, and palm oil, among others, according to the NBS. This underlying trend suggests that fundamental inflationary pressures remain, and the decline may be temporary.

“The fall in food prices is tied to seasonal factors such as the harvest period, and there’s a good chance we may see inflation pick up again in the coming months,” said financial analyst Tunde Alade. “While the current dip is welcome, it’s important to note that this might be just a momentary lull in an otherwise uphill battle against inflation.”

Fuel price hikes and economic reforms add pressure

One of the main factors contributing to concerns about future inflation is the government’s recent economic reforms, Reuters reported. President Bola Tinubu’s administration has implemented a series of measures to boost economic growth, including the removal of a long-standing fuel subsidy, a devaluation of the naira, and increases in electricity tariffs.

While these moves are aimed at shoring up public finances and stimulating economic recovery, they have also pushed up prices for fuel and basic services.

In August, the country experienced two petrol price hikes. This move caused further frustration among citizens already burdened by a rising cost of living. The removal of the fuel subsidy has been particularly controversial, with many Nigerians arguing that the government should have explored other options before resorting to such drastic measures.

“While the fuel subsidy removal is necessary for long-term growth, it has significantly worsened the cost-of-living crisis in the short term,” said Chioma Okeke, a Lagos-based economist. “These price hikes are likely to slow the pace of disinflation and keep inflation elevated for the foreseeable future.”

Central Bank’s response: More interest rate hikes?

The Central Bank of Nigeria (CBN) has been raising interest rates in a bid to curb inflation, with four rate hikes in 2024. The latest inflation figures are likely to influence the CBN’s decision-making process as it prepares to announce its next interest rate move. While some analysts believe the central bank may be nearing the end of its hiking cycle, others warn that further increases in petrol prices could force the bank to take more action.

“Petrol price increases and other inflationary risks could delay the disinflation process, making it difficult for the central bank to start cutting rates anytime soon,” said David Omojomolo, an Africa economist at Capital Economics. “We don’t expect the central bank to begin easing until early next year.”

Lingering risks: Flooding and food supply disruptions

In addition to economic reforms, there are other factors that could cause inflation to rise again in the coming months. Flooding in northern Nigeria has wiped out crops, leading to concerns about future food supply shortages. Analysts warn that these disruptions, combined with the lingering effects of fuel price hikes, could lead to another spike in inflation, particularly in the food sector.

“Food supply shocks from flooding, especially in the northern regions, are likely to disrupt markets and increase food prices,” said Samuel Adewole, an agricultural economist. “We can’t ignore these risks, especially when combined with the higher cost of fuel and transportation.”

If such disruptions continue, Nigeria’s inflation rate could again climb above the 32 per cent mark in the coming months, eroding any gains made during the August cool-off.

Optimistic projections, but caution is warranted

Despite these challenges, some experts remain cautiously optimistic about Nigeria’s inflation trajectory. Omojomolo of Capital Economics believes that inflation could continue to decline in the medium term, with the headline rate potentially falling below 30 per cent by the end of the year. However, he also notes that upside risks remain and that Nigeria’s disinflation process could be derailed by factors like fuel prices and weather-related shocks.

“On the whole, disinflation should continue, but it will be a slow and uneven process,” Omojomolo said. “There’s a real possibility that inflation could spike again if we see further disruptions in food supply or another round of fuel price increases.”

Overall, while the cooling of inflation in August has brought a glimmer of hope to Nigeria’s embattled economy, the road ahead remains fraught with challenges. President Tinubu’s reforms, though necessary for long-term stability, have added short-term pressure on households. The Central Bank of Nigeria’s interest rate decisions will be critical in determining the country’s inflation path in the coming months.