What to make of falling domestic prices since the beginning of this year?
The latter part of this query is the tale told by recent data on the consumer price index. The Nigeria Bureau of Statistics (NBS) records headline inflation at 17.26% (on a year-on-year) basis in March. This is lower by 0.52 percentage points on the February measure (17.78%), which in turn came in 0.94 percentage points lower than the rate recorded in January. These are year-on-year measures, comparing price rises for February and March 2017 with price rises for the same months last year.
It matters, then, that last year, prices rose precipitously in the 12 months to end-December — almost doubling from 9.55% as at December 2015 to 18.55% by year-end 2016. Depending on whom you speak to, the main impetus for price going up last year was the result of structural issues, including worsening external terms of trade since mid-July 2014, and increases in the price of government provisioned goods like fuel and electricity — since February last year. There are those who, instead, implicate secular problems like the central bank’s fiscalisation of monetary policy for the upward pressure on domestic prices. Fancy words? Put simply, the central bank lent more money to the federal government than the federal government had legitimate claim on from its economic activity.
Whatever the impetus was for price rises last year, when inflation is measured this year against the respective months for 2016, the huge increases in the “base” numbers for this measure would mean that increases this year will appear smaller — barring further structural or secular shocks to prices. This is how the so-called “base effect” works.
So, while inflation may have risen far less rapidly this year than it did last year, at 17.26%, it is not only rising, but it is too high, especially, given that there is little or no domestic activity supporting the price rise. Remember that domestic output continues to fall, once you back out activities in the oil exclave of the economy from your computation. To get a sense of how out of sync the inflation numbers are one need only recall that the March headline count is 1,126 basis points (bps) to 826bps higher than the Central Bank of Nigeria’s (CBN) medium-term target range for inflation (of 6 – 9%), 152bps above the inflation rate targeted by the federal government’s recently released Economic Recovery and Growth Plan (2017 – 2020), and 326bps above the central bank’s benchmark interest rate. (PS. A basis point is equal to a hundredth of a percentage point).
Because of the relatively small size of their earnings, and the stickiness of these downwards (they don’t adjust up easily) by shifting nominal costs up, inflation hurts the poor immensely. The most important reflection of inflation’s importance to the poor is in the choice of basket of goods, and the relative weights attached thereto with which the NBS calculates domestic prices. Ideally, our consumer price index aims to reflect the buying preferences of the man on the street. That way, government has a ready finger on the pulse of the street. If there is any truth to this claim, then over the last 14 months the poor and vulnerable segments of our population may have been poorly served by rising prices. Worse, is that despite the slower pace at which the year-on-year count is recorded as growing, on a month-on-month basis, domestic prices have been strengthening since December last year: from 1.06% then, to 1.72% in March this year.
If last year, the central bank tolerated inflation straying out of its target range by so much because the monetary easing that supported higher prices was “necessary to buffer the economic slowdown” (as reported by the IMF), then, ought we, in the light of the failure of that policy to reconsider the general thrust of domestic macroeconomic policy? Both fiscal and monetary policies have thus far failed to support domestic growth. But have instead inflicted incredible hardship on the people. Time, therefore, to rein in easy money and push inflation down, so that the poor and vulnerable segments of our populace may eke out in some comfort whatever remains of their miserable lives?
It could be argued though, that without the central bank turning on the quasi-fiscal faucets the downturn would have been more severe. In which case, why stop at simply turning on the faucet? It might make better sense to hand the CBN’s balance sheet over to the federal government (as was recently canvassed by the finance minister) in order that we may then hurl the kitchen sink at the problem.