Nigeria: Forex rates, transport costs to drive inflation – CBN
The Central Bank of Nigeria (CBN) has identified energy prices, exchange rates, and transportation costs as the primary factors that will influence inflation over the next six months.
This forecast was revealed in the CBN’s August Inflation Expectations Survey, which comes on the heels of a slight decline in Nigeria’s inflation rate to 33.40 per cent in July, down from 34.19 per cent in June.
The survey gathered insights from businesses and households across the country, reflecting their perceptions of inflation and future expectations.
According to the CBN, the respondents anticipate a gradual reduction in the inflation rate over the next six months, albeit with varying degrees of optimism between businesses and households.
Dr. Ayo Teriba, an economist and CEO of Economic Associates, explained that the interplay between these factors creates a complex environment for inflation management.
“Energy prices, particularly fuel, have a cascading effect on transportation and, by extension, on the cost of goods. Coupled with the volatile exchange rate, these elements can sustain inflationary pressures despite the recent decline in the headline rate.”
The CBN report noted that businesses are slightly more optimistic about the inflation outlook compared to households.
While businesses expect a lower inflation rate, households remain more cautious, reflecting concerns over the rising cost of living. The survey indicated that 84.9 per cent of respondents believe the current level of inflation is too high, with businesses showing slightly more optimism than households.
The survey also highlighted expected trends in consumer and business expenditure.
Respondents anticipate increased spending over the next month and the next three months, with positive indices of 29.2 and 30.3 points, respectively. However, they foresee a significant decline in expenditure over the next six months, reflected by a negative index of -7.8 points.
Dr. Teriba suggested that this cautious approach to spending might be a response to uncertainty in the economic environment. “Businesses and households are likely holding back on long-term expenditure commitments due to unpredictability in key economic variables like energy prices and exchange rates. This could indicate a period of reduced economic activity if these concerns are not addressed.”
Similarly, Dolapo Oni, an energy analyst, pointed out the critical role of energy costs in shaping consumer and business behavior. “With energy costs expected to remain high, it’s no surprise that both businesses and households are signaling a tightening of their budgets. The government’s ability to stabilize these costs will be crucial in managing inflation expectations.”
Dr. Teriba emphasized the importance of a coordinated policy approach: “The government needs to address the underlying factors driving inflation. Stabilizing the exchange rate and managing energy costs will be key to achieving sustainable economic stability.”
Dolapo Oni also stressed the need for infrastructure improvements to reduce transportation costs, which are a significant component of inflation. “Investing in transportation infrastructure can help mitigate the impact of rising energy prices and create a more stable economic environment.”
