Inflation has been plaguing the Nigeria economy for decades. But what are the causes of inflation in Nigeria? Find out about the main causes of inflation in Nigeria in this article. Here, you can also find the inflation definition and the information about the current inflation rate in Nigeria.
What is inflation?
If we need to define inflation, we can simply describe it as a persistent rise of prices for services and goods, which causes the currency’s power to fall. It is most often expressed numerically through the Consumer Price Index, or CPI.
A lot of countries struggle with inflation, so it is not a rare occurrence in the world. However, Nigeria’s situation with inflation is special.
Why?
Find out below!
Causes of inflation in Nigeria
READ ALSO: General overview of the Nigerian economy and its economic potentials
There are two main peculiarities about the inflation in Nigeria. First of all, it is extremely erratic. In the past few decades, it has been jumping up and down, from being 47.56 in 1996 to -2.49 in 2000.
Second of all, despite being quite a popular topic among the economists, inflation in Nigeria is severely understudied. There is very little information on what causes it, but we have managed to figure out five main causes of inflation in Nigeria.
Here they are:
Ineffective monetary and fiscal policies
The first cause seems quite obvious. The main goal of every central bank is to keep the economy on the level above deflation and below inflation. The banks can achieve it through implementation of appropriate monetary and fiscal policies. The Central Bank of Nigeria (CBN), however, has been failing at it for a long time.
It’s not even that its policies are completely unreasonable. The biggest problem of CBN is that it is unable to react fast enough to the rising inflation. Over the years, it has tried both the expansionary and tight fiscal policies, but both have consequently failed. The first policy only worsened the inflation, while the second upset the population.
The unstable course of the CBN causes naira to depreciate. This, in turn, provokes the spike in prices for everything, as money’s worth plummets down. Thus, CBN has been failing to keep the inflation rate in single digits for many years.
Money supply
This factor is tied in closely with the previous one. Many economists have proven through their research that the money supply has a great influence on the inflation rate in the country. And who regulates the money supply?
Correct.
The CBN. When they opt for the expansionary policy, the amount of money in circulation increases. The money injected into the Nigerian economy causes the surge in prices, which often results in pay raises. If the process is not stopped in time, it can go on forever, until a loaf of bread goes for several million naira.
The relationship between the money supply and inflation is a favourite topic for many economists. A few of them argue that the budget deficit has a negative effect on the inflation along with money supply. At the same time, others claim that this factor has little to do with the money supply. We could talk about it for hours, but it is time to move on to the next cause.
Exchange rate movements and expected inflation
All of the aforementioned factors negatively affect the situation with exchange rates. As naira starts to cost less and less, the exchange rate collapses. This results in higher import costs and increased inflationary expectations.
Several economists who study the causes of inflation in Nigeria agree that the expected inflation, along with ever-changing exchange rates, heavily influence the inflation.
How?
When people expect the prices to go up, they buy everything they can get their hands on. The demand for said product increases, so does the price, which results in inflation. While the exchange rate can be somehow reasoned with, human psychology is not as easy to deal with. It is human nature to fear and do irrational things out of fear. Which leads us to the next reason.
Unstable political situation
One should not discount the role of politics in the economic state of the country. For years, Nigeria has been suffering from civil unrest and separatist movements. This has a lasting effect on the economy. The problem regions produce less, and the demand for locally sourced goods is not met.
But wait, there is more:
Unstable political situation also forces people to stock up on necessities for possible emergencies. This leads to empty shelves in the shops and to higher demand for basic goods. That, in turn, causes a surge in prices for things that are bought most often.
Agroclimatic conditions
This factor might seem a bit outlandish, but we cannot discount the influence of weather. As Nigeria is prone to severe floods and droughts, its food production is unstable. As soon as a natural disaster hits, the prices for locally grown produce skyrocket.
That is why, when talking about inflation, it is important to remember about the non-economic factors. While most of the previous causes can be remedied and/or prevented, nature cannot be reasoned with.
Current inflation rate in Nigeria
All things considered, Nigeria seems to be on the right track, as its CPI has been gradually dropping. In July, it was reported that it reached the 16.05 mark. Obviously, it is still not a single-digit number, as the CBN hoped. However, this shows that their current policy is working. We just have to wait and see if the next few months are just as successful.
That is it for our list of causes of inflation in Nigeria. We hope it has helped you understand the economic situation in Nigeria a little bit better.
READ ALSO: Structural adjustment programme in Nigeria: causes, processes and outcomes
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